As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-7247
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
To
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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CURATIVE HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1503914
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
14 Research Way, Box 9052
East Setauket, New York 11733-9502
(516) 689-7000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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John Vakoutis, President and Chief Executive Officer
Curative Health Services, Inc.
14 Research Way, Box 9052
East Setauket, New York 11733-9502
(516) 689-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Timothy S. Hearn Frederick W. Kanner
Dorsey & Whitney LLP Dewey Ballantine
220 South Sixth Street 1301 Avenue of the Americas
Minneapolis, Minnesota 55402 New York, New York 10019-6092
(612) 340-2600 (212) 259-8000
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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SUBJECT TO COMPLETION, DATED AUGUST 1, 1996
PROSPECTUS
1,250,000 Shares
[LOGO]
Common Stock
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All of the shares of Common Stock offered hereby are being sold by Curative
Health Services, Inc. ("Curative" or the "Company").
The Common Stock of the Company is traded on the Nasdaq Stock Market's
National Market under the symbol "CURE." On July 31, 1996, the last sale price
for the Common Stock as reported by Nasdaq was $18 1/4 per share.
See "Risk Factors" beginning on page 6 for a discussion of certain factors
that should be considered by prospective purchasers.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company (2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total (3) $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
187,500 additional shares of Common Stock on the same terms as set forth
above to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
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The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them, and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about , 1996
at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.
------------
Smith Barney Inc.
Hambrecht & Quist
Vector Securities International, Inc.
, 1996
<PAGE>
[Map]
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."
Wound Care Center(R) and Procuren(R) are registered trademarks and Wound
Management ProgramSM is a service mark of Curative Health Services, Inc.
2
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including the notes thereto)
appearing elsewhere in this Prospectus.
The Company
Curative Health Services, Inc. is a leading disease management company in
the chronic wound care market. Currently, the Company manages, on behalf of
hospital clients, a nationwide network of Wound Care Centers(R) that offers a
comprehensive range of services which enable the Company to provide customized
wound care. The Company's Wound Management ProgramSM consists of diagnostic and
therapeutic treatment regimens which are designed to meet each patient's
specific wound care needs on a cost effective basis. The Company's treatment
regimens are based on critical pathways designed for wound healing. The Company
has a proprietary database of patient outcomes that the Company has collected
since 1988 containing approximately 100,000 patient records which indicate an
overall healing rate of approximately 80% for patients completing therapy. The
Company's Wound Care Center network consists of 90 outpatient clinics located on
or near campuses of acute care hospitals in 29 states. The Company is developing
new service models for other health care delivery settings and currently manages
five inpatient wound care programs at subacute and long term acute care
facilities and operates four freestanding Wound Care Centers.
Chronic wounds are typically prevented from healing due to insufficient
blood circulation to the wound site and may lead to infection, gangrene and
amputation. Chronic wounds are common in patients with diabetes and venous
stasis disease, as well as in patients who are immobilized and afflicted with
pressure sores. According to a study published in 1990, it is estimated that at
least three million people suffer from chronic wounds in the United States. It
is also estimated that this segment of the U.S. health care industry generated
$2 billion in expenditures in 1994. It is anticipated that the wound care market
will continue to grow due to the aging population and the increase in health
disorders, such as diabetes, which may lead to chronic wounds.
Traditional chronic wound care treatment, which is typically administered
by a primary care physician, relies principally on cleansing and debriding the
wound, controlling infection with antibiotics and protecting the wound. In many
cases, the patient may need to see a number of health care professionals before
effective treatment is received. In addition, under this traditional care model,
patients must manage their own care, which often leads to non-compliance and
treatment failure which may lead to infection, gangrene and amputation. Although
wound care programs have begun to evolve to more specialized and aggressive
treatment regimens, the Company believes that a significant medical need and
market opportunity exists for products and services that improve and accelerate
the wound healing process.
The Company's Wound Management Program is a comprehensive array of
diagnostic and therapeutic treatment regimens with all the components of care
necessary to treat chronic wounds. The Wound Management Program includes
assessment, vascular studies, revascularization, infection control, wound
debridement, growth factor therapy, skin grafting, nutrition, protection
devices, patient education, referrals and effective management of care through
patient/provider communication. The Wound Management Program is a comprehensive
program that is fully integrated with services required for wound care. The
Company believes the Wound Management Program provides a better approach to
chronic wound management than the traditional approach. A unique aspect of the
Company's Wound Management Program is the use of Procuren(R), the Company's
proprietary wound healing agent. The Company also believes that the high degree
of specialization and expertise offered by the Wound Care Centers provide
benefits: (i) to patients through superior wound care, thus enhancing their
quality of life and, in many cases, allowing them to avoid amputation; (ii) to
affiliated hospitals by enabling them to differentiate themselves from their
competitors through better wound care treatment outcomes, to reduce costs by
decreasing inpatient lengths of stay and to increase revenue through the
introduction of new patients; (iii) to affiliated physicians by providing
greater access to patients; and (iv) to insurers and managed care providers by
offering a cost effective alternative to traditional wound care.
The Company was originally founded as a biopharmaceutical company for the
research, development, production and marketing of therapeutic products derived
from naturally occurring human growth factors, such as Procuren, which the
Company introduced in January 1988. During 1994 and 1995, the Company realigned
its business strategy to focus on developing and expanding its growing wound
care business while terminating its research and development of new products in
order to achieve profitability and enhance its long term growth potential.
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3
<PAGE>
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The Company's objective is to enhance its position as a leading disease
management company in the chronic wound care market. The Company's growth
strategy is to continue to improve and refine the Wound Management Program while
broadening its delivery models to cover the entire continuum of care for wound
management. Key elements of this strategy include: (i) continued development of
the Company's nationwide network of outpatient Wound Care Centers at acute care
hospitals; (ii) expansion of the Company's Wound Management Program into new
health care delivery settings such as inpatient programs and freestanding
centers when suitable hospital clients are not available; (iii) continued
development of relationships with managed care organizations; (iv) enhancement
of the Wound Management Program by incorporating new wound care products and
services through acquisition or co-marketing arrangements; and (v) the eventual
addition of other disease management programs to meet the needs of patients and
providers in complementary areas such as the treatment of diabetes.
The Offering
Common Stock being offered ..................... 1,250,000 shares(1)
Common Stock outstanding after the offering..... 11,986,267 shares(1)(2)
Use of proceeds................................. For working capital and other
general corporate purposes,
including to finance the
development of (i) new wound
care programs and (ii)
systems to support the
Company's managed care
marketing capabilities
Nasdaq National Market Symbol................... CURE
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(1) Does not include up to 187,500 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares outstanding as of July 31, 1996. Excludes
1,195,990 shares of Common Stock issuable upon the exercise of options
outstanding as of July 31, 1996. See Note F of Notes to Consolidated
Financial Statements of the Company.
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Unless otherwise indicated, (i) information in this Prospectus assumes no
exercise of the Underwriters' option to purchase from the Company up to 187,500
additional shares of Common Stock to cover over-allotments, if any, and (ii)
references in this Prospectus to "Curative" or the "Company" refer to Curative
Health Services, Inc. and its subsidiaries. This Prospectus, including the
information incorporated by reference herein, contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include those discussed
in "Risk Factors."
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4
<PAGE>
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Summary Consolidated Financial Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues......................................... $31,265 $40,567 $52,442 $24,929 $31,305
Costs and operating expenses:
Costs of product sales and services............ 15,970 19,688 25,253 12,494 17,359
Selling, general and administrative ........... 12,717 15,967 19,145 8,877 9,613
Research and development ...................... 7,852 6,480 4,143 2,394 --
Restructuring charge .......................... -- 1,684 -- -- --
Income (loss) from continuing operations
before interest income and
minority interest.............................. (5,274) (3,252) 3,901 1,164 4,333
Income (loss) from continuing operations ........ (4,389) (2,728) 4,429 1,377 4,700
Income (loss) per share from continuing
operations, after income taxes................. $ (.44) $ (.27) $ .39 $ .13 $ .38
Weighted average common and common
equivalent shares outstanding(1)............... 9,904 9,958 10,768 10,256 11,306
Operating Data:
Wound care facilities at end of period .......... 56 63 84 71 99
Number of new patients........................... 16,235 22,529 30,023 14,356 18,426
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-----------------------
Actual As Adjusted(2)
------- ----------
<S> <C> <C>
Balance Sheet Data:
Working capital.............................................................. $ 17,444 $38,544
Total assets ................................................................ 30,185 51,285
Long-term debt............................................................... 1,000 1,000
Deficit ..................................................................... (25,609) (25,609)
Stockholders' equity ........................................................ 20,812 41,912
</TABLE>
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(1) See Note A to Notes to Consolidated Financial Statements of the Company.
(2) Adjusted to give effect to the sale of the shares of Common Stock offered
hereby at an assumed offering price of $18.25 per share and the receipt of
the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
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5
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
relating to the business of the Company before making an investment. This
Prospectus, including the information incorporated by reference herein, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual
results could differ significantly from those projected in the forward-looking
statements as a result, in part, of the risk factors set forth below.
Reliance on Key Customer; Related Party Issues
At December 31, 1995, the Company had management contracts with 28 acute
care hospitals directly or indirectly owned by Columbia/HCA Healthcare
Corporation ("Columbia/HCA"). These hospitals collectively accounted for
approximately 24% of the consolidated revenues of the Company for the year ended
December 31, 1995 and 28% for the six months ended June 30, 1996. The
termination or non-renewal of all or a substantial part of the management
contracts with hospitals owned by Columbia/HCA would have a material adverse
effect on the Company's business, financial condition and results of operations.
See Note I of Notes to Consolidated Financial Statements of the Company. Of
these 28 contracts with Columbia/HCA hospitals, all are currently in their
initial terms. During the 12 month period ending June 30, 1997, four of the
Company's contracts with Columbia/HCA hospitals will be subject to renewal.
The Company and Columbia/HCA are currently in discussions initiated by
Columbia/HCA to standardize the management contracts and operating procedures at
the Wound Care Centers owned by Columbia/HCA, as well as any Wound Care Centers
to be opened by Columbia/HCA in the future. Although the Company believes that
standardizing the management contracts and operating procedures will ultimately
strengthen its relationship with Columbia/HCA, there can be no assurance these
discussions with Columbia/HCA will not result in changes which could have an
adverse impact on the Company's business, financial condition and results of
operations, including, without limitation, price concessions, contract
termination provisions less favorable to the Company, and increased costs borne
by the Company.
Medicare regulations limit reimbursement for health care charges paid to
related parties. A party is considered "related" to a provider if it is deemed
to be controlled by the provider. One test for determining control for this
purpose is whether the percentage of the total revenues of the party received
from services rendered to the provider is so high that it effectively
constitutes control. Although the Company believes it does not currently receive
sufficient revenues from any customer, including Columbia/HCA, that would make
it a related party, it is possible that such regulations could limit the number
of management contracts that the Company could have with Columbia/HCA or any
other client.
Potential Government Regulation of Procuren
The United States Food and Drug Administration ("FDA") regulates drugs and
biologics that move in interstate commerce and requires that such products
receive pre-marketing approval based on evidence of safety and efficacy. Since
Procuren is produced at one of the Company's blood processing facilities in the
state where the Wound Care Center which will dispense the Procuren is located
and so is not intended to be shipped across state lines, the Company believes,
based on the advice of its counsel, that under current law and regulations, FDA
approval is not required for the Company to distribute and sell Procuren through
the Wound Care Centers. The FDA is currently reassessing its regulation of other
autologous and somatic cell products and has publicly stated that it believes
that if any component of a drug or biological or if any patient receiving such
substance moves in interstate commerce, a sufficient nexus with interstate
commerce exists for the FDA to require pre-marketing approval and licensure.
While the production of Procuren includes components that are shipped in
interstate commerce, to date the FDA has not determined that Procuren, as
currently prepared, is subject to licensure or pre-market approval. Although the
Company believes interstate shipment of the final biologic product is required
to trigger pre-marketing approval and licensure, a determination by the FDA to
require Procuren to obtain pre-marketing approval would materially and adversely
affect the Company.
Because FDA approval has not been required for Procuren, and state
approvals are generally limited to licensing of facilities, there has been no
independent determination of its efficacy by any governmental entity. If the FDA
were to require submission of a product license application ("PLA") as a
condition for the continued distribution and sale of Procuren, the Company might
have to demonstrate the safety, purity, potency and effectiveness of the
6
<PAGE>
product through extensive clinical trials. Neither the Company nor any third
party has conducted the controlled clinical trials required to establish
Procuren's efficacy. Compliance with the requirements for a PLA is
time-consuming and involves the expenditure of substantial resources. There can
be no assurance that the Company would be able to establish efficacy or to
obtain or maintain the necessary FDA approvals to manufacture and distribute
Procuren.
Any change in current regulatory interpretations by or positions of state
officials where the Wound Care Centers are located could adversely affect the
Company's distribution of Procuren within those states. In states where Wound
Care Centers are not currently located, the Company intends to utilize the same
approaches adopted elsewhere for achieving state compliance. However, state
regulatory requirements could adversely affect the Company's ability to
establish Wound Care Centers in such other states.
Uncertainty Related to Health Care Reform
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far, the
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery and payment systems and may in the
future propose and adopt legislation effecting fundamental changes in the health
care delivery system. It is possible that future legislation enacted by Congress
or state legislatures will contain provisions which may materially adversely
affect the business, financial position and results of operations of the Company
or may change the operating environment for the Company's targeted customers
(including hospitals and managed care organizations). Health care industry
participants may react to such legislation or the uncertainty surrounding
related proposals by curtailing or deferring expenditures and initiatives,
including those relating to the Company's programs and services. It is also
possible that future legislation either could result in modifications to the
nation's public and private health care insurance systems, which could affect
reimbursement policies in a manner adverse to the Company, or could encourage
integration or reorganization of the health care delivery system in a manner
that could materially adversely affect the Company's ability to compete or to
continue its operations without substantial changes. The Company cannot predict
what other legislation relating to its business or to the health care industry
may be enacted, including legislation relating to third party reimbursement, or
what effect any such legislation may have on its business, financial position
and results of operations.
Contract Terms and Renewals
A substantial portion of the revenues of the Company are derived from
management contracts with acute care hospitals. The contracts generally have
initial terms of three to five years and many have automatic renewal terms
unless specifically terminated. During the 12 month period ending June 30, 1997,
the initial terms of 28 of the Company's management contracts will expire,
including 22 contracts which provide for automatic one-year renewals. The
contracts often provide for early termination either by the client hospital if
specified performance criteria are not satisfied, or by the Company under
various other circumstances. Historically, some contracts have expired without
renewal and others have been terminated by the Company or the client hospital
for various reasons prior to their scheduled expiration. Generally, the Company
elects to negotiate a mutual termination of a management contract if a client
hospital desires to terminate the contract prior to its stated term. The
continued success of the Company is subject to its ability to renew or extend
existing management contracts and obtain new management contracts. Hospitals
choose to terminate or not to renew contracts based on decisions to terminate
their programs or to convert their programs from independently managed programs
to programs operated internally. There can be no assurance that any hospital
will continue to do business with the Company following expiration of its
management contract or earlier if such management contract is terminable prior
to expiration. In addition, any changes in the Medicare program or third party
reimbursement levels generally which have the effect of limiting or reducing
reimbursement levels for health services provided by programs managed by the
Company could result in the early termination of existing management contracts
and would adversely affect the ability of the Company to renew or extend
existing management contracts and to obtain new management contracts. The
termination or non-renewal of a material number of management contracts could
result in a significant decrease in the Company's net revenues and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
7
<PAGE>
Recent Changes in Business Strategy
In 1994 and 1995 the Company implemented a strategic redirection, which
involved terminating substantially all of its research and development
activities and focusing on the development of its Wound Care Center network and
Wound Management Program. Since January 1994, the Company's hospital outpatient
Wound Care Center network has grown from 56 centers to 90 centers, and the
Company intends to commit substantial resources to the aggressive growth of this
business. There can be no assurance that this strategic redirection will be
successful. As a part of the Company's growth strategy, the Company intends to
expand into new health care delivery settings, such as subacute and long term
care facilities, open freestanding Wound Care Centers and develop contractual
relationships with managed care organizations. There can be no assurance that
the Company will be able to successfully implement these components of its
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note L of Notes to Consolidated Financial Statements
of the Company.
Third Party Reimbursement
The Company, through its wound care operations, provides contractual
management services for fees and sells Procuren to acute care hospitals and
other health care providers. These providers, in turn, seek reimbursement from
third party payors, such as Medicare, Medicaid, health maintenance organizations
and private insurers, including Blue Cross/Blue Shield plans. The availability
of reimbursement from such payors has been a significant factor in the Company's
ability to increase its revenue streams and will be important for future growth.
In addition to the hospital outpatient Wound Care Centers which it manages
for its clients, the Company owns and operates freestanding outpatient Wound
Care Centers. With respect to services and products provided through its
freestanding centers, the Company is subject to the risks inherent in third
party reimbursement, including the risks associated with billing third party
payors. As of June 30, 1996, the Company operated four freestanding outpatient
Wound Care Centers which contributed approximately $251,000 or less than 1% of
the Company's revenues for the six months ended June 30, 1996. However, the
Company anticipates that the number of, and amount of revenues attributable to,
its freestanding centers will increase in the future as the Company pursues its
strategy of expanding into new health care delivery settings. See "Business --
Strategy."
Each third party payor formulates its own coverage and reimbursements
decisions. In 1992 the Health Care Financing Administration ("HCFA"), the agency
that administers the Medicare program nationally, published a national coverage
decision denying coverage for Procuren based on its determination that the
safety and efficacy of Procuren had not been established and so the use of
Procuren was not "reasonable and necessary" within the meaning of applicable
law. Procuren sales represent a significant part of the Company's revenues and
earnings and the Company believes that Procuren, as a component of its Wound
Management Program, is a significant component of the Company's services.
Although the Company has not, and the Company believes that its clients have
not, in general experienced difficulty in securing third party reimbursement for
Wound Care Center services and the use of Procuren from private insurers, some
hospitals have experienced denials, delays and difficulties in obtaining such
reimbursement. In some cases where Procuren reimbursement has been denied by a
payor, the hospitals have ceased providing Procuren to patients whose only means
of payment is through such payor. To the Company's knowledge, no widespread
denials have been received by hospitals regarding reimbursement for other Wound
Care Center services or reimbursement of management fees charged by the Company
to its hospital clients. There can be no assurance that there will not be a
material increase in disallowance of reimbursements of the Company's management
fees by Medicare or third party payors. The Company discusses coverage and
reimbursement issues with its hospital clients and third party payors on a
regular basis. Such discussions will continue as the Company seeks to maximize
hospital reimbursement for Procuren and other wound care services. Although no
individual coverage and reimbursement decision is material to the Company, a
widespread denial of reimbursement coverage for Procuren or other services would
have a material adverse effect on the Company's business, financial position and
results of operations.
There are increasing public and private sector pressures to contain health
care costs and to restrict rates for medical services. Continuing budgetary
constraints at both the federal and state level have led, and are likely to
continue to lead, to significant reductions in government and other third party
reimbursements for medical charges and to the negotiation of reduced contract
rates or capitated or other financial risk-shifting payment systems by third
party payors with service providers. There can be no assurance that the payments
under governmental and private third party payor programs will remain at levels
comparable to present levels. Changes in reimbursement regulations,
8
<PAGE>
policies, practices, interpretations or statutes that place material limitations
on reimbursement accounts or practices could adversely effect the Company's
business, financial position and results of operations.
Government Regulation of the Company's Wound Care Operations
The Company's Wound Care Centers and the production and marketing of its
products and services are subject to extensive regulation by numerous
governmental authorities in the United States, both federal and state. Although
the Company believes that it is currently in compliance with applicable laws,
regulations and rules, some of such laws are broadly written and subject to
little or no interpretation by courts or administrative authorities. Hence,
there can be no assurance that a third party or governmental agency will not
contend that certain aspects of the Company's operations or procedures are
subject to or are not in compliance with such laws, regulations or rules or that
the state or federal regulatory agencies or courts would interpret such laws,
regulations and rules in the Company's favor. The sanctions for failure to
comply with such laws, regulations or rules could include denial of the right to
conduct business, significant fines and criminal penalties. Additionally, an
increase in the complexity or substantive requirements of such laws, regulations
or rules could have a material adverse effect on the business, financial
position and results of operations of the Company.
Various state and federal laws regulate the relationships between providers
of health care services and physicians and other clinicians, including
employment or service contracts, investment relationships and referrals for
certain designated health services. These laws include the fraud and abuse
provisions and referral restrictions of the Medicare and Medicaid statutes,
which prohibit the solicitation, payment, receipt or offering of any direct or
indirect remunerations for the referral of Medicare and Medicaid patients or for
the ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil or criminal
penalties for individuals or entities including exclusion from participation in
the Medicare or Medicaid programs. Several states have adopted similar laws that
cover patients in private programs as well as government programs. Because the
anti-fraud and abuse laws have been broadly interpreted, they limit the manner
in which the Company can operate its business and market its services to, and
contract for services with, other health care providers. No assurance can be
given regarding compliance in any particular factual situation, as there is no
procedure for advisory opinions from government officials.
Additionally, federal and some state laws impose restrictions on
physicians' referrals for certain designated health services to entities with
which they have financial relationships. The Company believes its operations are
structured to comply with these restrictions to the extent applicable. However,
there are efforts to expand the scope of these referral restrictions. Federal
legislation is being considered to expand current law from its application to
Medicare and Medicaid business to all payors, and to additional health services.
Certain states are considering adopting similar restrictions or expanding the
scope of existing restrictions. There can be no assurance that the federal
government or other states in which the Company operates will not enact similar
or more restrictive legislation or restrictions that could under certain
circumstances limit the manner in which the Company can operate its business and
have a negative impact on the Company's business, financial condition and
results of operations.
Patents and Proprietary Rights
The Company's success depends in part on its ability to enforce patents,
maintain trade secret protection and operate without infringing on or violating
the proprietary rights of third parties. One U.S. patent has issued, and one
additional application for a patent in the United States has been filed,
relating to the manufacture and use of Procuren for wound care. There can be no
assurance that any pending patent applications will be approved or that any
issued patents will provide the Company with competitive advantages in the
future or will not be challenged by any third parties or, if involved in a
challenge, will be found valid and infringed. Furthermore, there can be no
assurance that others will not design around the patents. The issued U.S. patent
is jointly owned by the University of Minnesota and the Company. The joint
interest of the University of Minnesota is licensed exclusively to the Company
under a paid in full, royalty free arrangement. The U.S. government has a
nonexclusive grant back license under the issued U.S. patent for all government
purposes. The additional pending U.S. application is owned by the Company and is
not subject to the government grant back license.
Litigation involving enforcement of the Company's patents or other
proprietary rights against third parties or assertion against the Company of
patents or other proprietary rights of third parties may arise. In addition,
certain proceedings affecting the patent rights of the Company can arise in the
U.S. Patent and Trademark Office. If competitors of the Company prepare and file
patent applications in the United States that claim technology also
9
<PAGE>
claimed by the Company, the Company may have to participate in interference
proceedings declared by the U.S. Patent and Trademark Office to determine
priority of invention. A third party or the U.S. Patent and Trademark Office may
initiate a re-examination proceeding raising issues of scope or validity of any
patent issued to the Company. An adverse outcome in litigation against the
Company could subject the Company to significant liabilities to third parties,
require rights to be licensed from third parties or require the Company to cease
using rights owned by a third party. An adverse outcome in litigation by the
Company to enforce its rights or in an interference could cause the loss of
rights the Company relies on or plans to rely on for competitive advantage. In
litigation by or against the Company or in proceedings in the U.S. Patent and
Trademark Office, substantial costs to the Company may be involved, even if the
eventual outcome is wholly or partially favorable to the Company.
In addition to patent protection, the Company also relies, in part, on
trade secrets, proprietary know-how and technological advances which it seeks to
protect by measures such as confidentiality agreements with its employees,
consultants and other parties with whom it does business. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, that others will not independently
develop products similar to Procuren, or that the Company's trade secrets and
proprietary know-how will not otherwise become known, be independently
discovered by others or be found to be unprotected. The Company is aware of a
limited number of physicians who appear to be utilizing an autologous platelet
extract for the treatment of chronic wounds. See "Business -- Patents and
Proprietary Rights."
Risk of Professional, Product and Hazardous Substance Liability; Availability of
Insurance
The provision of medical services entails an inherent risk of professional
malpractice and other similar claims. In connection with the provision of its
wound care products and services, the Company does not control or direct the
practice of medicine by physicians and does not assume responsibility for
compliance with certain regulatory and other requirements directly applicable to
physicians and physician groups; however, there can be no assurance that claims,
suits or complaints relating to medical services and products provided by
physicians in connection with one of the Company's Wound Care Centers or
inpatient wound care programs will not be asserted against the Company in the
future. Moreover, as the owner and operator of freestanding outpatient Wound
Care Centers, the Company will be subject to increased risk of professional
liability with respect to the medical services provided at those Wound Care
Centers.
The production, marketing and sale of Procuren entails an inherent risk
that product liability claims will be asserted against the Company. The Procuren
production process generally involves extracting blood from a patient and using
the platelets in the blood to stimulate the release of growth factors. Although
the Company believes it takes the precautions required by applicable regulations
to minimize risks of adverse reaction to Procuren and infectious disease
transmission, these risks cannot be entirely eliminated. In the event of any
such adverse reaction or infectious disease transmission, the Company could be
held liable for any damages that result, and such liability could adversely
affect the Company's business, financial condition and results of operations.
The Company's operations involve the handling of bio-hazardous materials.
Employees of the Company, like those of all companies that provide services
dealing with human blood specimens, may be exposed to risks of infection from
AIDS, hepatitis and other blood-borne diseases if appropriate laboratory
practices are not followed. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
infection or injury from these materials cannot be completely eliminated. In the
event of such an accident, the Company could be held liable for any damages that
result, and such liability could adversely affect the Company's business,
financial condition and results of operations.
The Company's operations expose it to product and professional liability
risks that are inherent in managing the delivery of wound care services, and the
manufacturing and marketing of biologicals. The Company currently maintains
professional and product liability insurance coverage of $10 million in the
aggregate. There can be no assurance that coverage limits of such insurance
would be adequate to protect the Company against any potential claims, including
claims based upon the transmission of infectious disease, or otherwise. In
addition, there can be no assurance that the Company will be able to obtain or
maintain professional and product liability insurance in the future on
acceptable terms or with adequate coverage against potential liabilities.
10
<PAGE>
Competition
In the market for disease management products and services, the Company
faces competition from other disease management facilities, general health care
facilities and service providers, pharmaceutical companies, biopharmaceutical
companies and other competitors. Many of these companies have substantially
greater capital resources and marketing staffs, and greater experience in
commercializing products and services, than the Company. In addition, recently
developed technologies, or technologies that may be developed in the future, are
or may be the basis for products which compete with the Company's chronic wound
care products. The Company is aware that other companies are developing products
which may be in direct competition with Procuren. There can be no assurance that
the Company will be able to enter into co-marketing arrangements with respect to
these products, or that the Company will be able to compete effectively against
such companies in the future.
Utilization of Net Operating Loss Carryforwards
From its inception in 1984 through the year ended December 31, 1994, the
Company incurred significant net operating losses. The Company recorded its
first profitable year in the year ended December 31, 1995. As of June 30, 1996,
the Company had an accumulated deficit of $25.6 million. Additionally, the
Company had approximately $28 million of net operating losses and research
credits as of December 31, 1995, which may be used to reduce taxable income and
income taxes in future years. The utilization of these losses to reduce future
income taxes will depend on the generation of sufficient taxable income prior to
the expiration of the net operating loss carryforwards. The carryforwards begin
to expire in 1999 and will expire through 2009. Additionally, based on ownership
changes which occurred in connection with several rounds of private equity
capital raised by the Company prior to its initial public offering in 1991, it
is expected that the annual utilization of the otherwise available net operating
loss carryforwards will be limited by the provisions of Section 382 of the
Internal Revenue Code, as amended. As such, the Company may be restricted as to
the utilization of its net operating loss carryforwards. There can be no
assurance that the Company will be able to use all of its net operating loss
carryforwards prior to their expiration. See Note G of Notes to Consolidated
Financial Statements of the Company.
Dependence on Key Personnel
The Company's success depends upon key management personnel, and the loss
of their services could adversely affect the Company's business and prospects.
In addition, the success of the Company will depend, among other things, upon
the successful recruitment and retention of qualified personnel. Since December
31, 1993, the Company has lost six executive officers, including its chief
executive officer, primarily due to the restructuring and realignment of the
Company's business. The Company has been successful in recruiting replacements
for these positions without experiencing a material adverse impact on its
business; however, there can be no assurance that the Company will be able to
retain all of its key management personnel or be successful in recruiting
additional replacements should that become necessary.
Certain Anti-takeover Provisions
Certain provisions of the Company's Fourth Restated Articles of
Incorporation, as amended, and Amended and Restated By-Laws could have the
effect of discouraging a third party from pursuing a non-negotiated takeover of
the Company and preventing certain changes in control. These provisions include
advance notice to the Board of Directors of stockholder proposals and
stockholder nominees, limitations on the ability of stockholders to remove
directors and call stockholders meetings, the requirement that vacancies in the
Board of Directors may be filled only by a majority of the remaining directors
and the ability of the Board of Directors to issue, without further stockholder
approval, preferred stock with rights and privileges that could be senior to the
Common Stock.
The Company is subject to Minnesota statutes regulating business
combinations and restricting voting rights of certain persons acquiring shares
of the Company which may hinder or delay a change in control of the Company. In
general, such statutes provide that the shares of a corporation acquired in a
"control share acquisition" have no voting rights unless voting rights are
approved in a prescribed manner. A "control share acquisition" is an
acquisition, directly or indirectly, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power in the election of
directors of 20% or more. Additionally, such statutes prohibit a public
Minnesota corporation from engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved in a prescribed manner.
11
<PAGE>
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
In October 1995 the Company adopted a Shareholders Rights Plan (the
"Plan"). The Plan is intended to encourage potential acquirors to negotiate with
the Company's Board of Directors and to discourage coercive, discriminatory and
unfair proposals. The Plan has certain anti-takeover effects, including the
ability to cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors of the
Company. As a result, the Plan could add substantially to the cost of acquiring
the Company, and consequently could delay or prevent a change in control of the
Company. These effects could adversely affect the market price for the Common
Stock. See Note F of Notes to Consolidated Financial Statements of the Company.
Possible Volatility of Stock Price in the Public Market
The market price of the Common Stock has experienced and may continue to
experience substantial volatility. Many factors have influenced the Common Stock
price in the past, including the Company's history of losses, its financial
position, management changes, negative publicity from the legal actions brought
against the Company and failure of management to achieve new biopharmaceutical
product development goals. Announcements of technological innovations or new
products or services by the Company or its competitors, developments or disputes
concerning patents or proprietary rights, regulatory developments and economic
and other external factors, as well as periodic fluctuations in the Company's
financial results, may have a significant impact on the market price of the
Common Stock. In addition, the securities markets have from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. These fluctuations could
adversely affect the market price of the Common Stock.
12
<PAGE>
THE COMPANY
The Company, a Minnesota corporation, was organized in 1984 under the name
CuraTech, Inc. and changed its name to Curative Technologies, Inc. in March 1990
and to Curative Health Services, Inc. in June 1996. The Company's principal
offices are located at 14 Research Way, East Setauket, New York 11733-9052 and
its telephone number at that location is (516) 689-7000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered hereby are estimated to be $21,100,000 ($24,325,117 if the Underwriters'
over-allotment option is exercised in full), assuming a public offering price of
$18.25 per share and after deducting underwriting discounts and commissions and
estimated offering expenses.
The Company intends to use the net proceeds for working capital and other
general corporate purposes, including to finance the development of (i) new
wound care programs and (ii) systems to support the Company's managed care
marketing capabilities by analyzing and comparing the outcome and cost of the
Company's wound care programs with alternative treatments and technologies
available to the Company's customers. The Company also may use a portion of the
net proceeds to acquire disease management businesses, products or technologies
complementary to the Company's business, although it has no present definitive
agreement or letter of intent with respect to any such acquisition.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of this offering in short-term, interest
bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company trades under the symbol "CURE" on the
Nasdaq National Market. The following table sets forth the high and low last
sale prices of the Common Stock for each of the periods indicated.
High Low
------- -------
1994
First Quarter ................................. $ 6 1/2 $ 3 1/2
Second Quarter ................................. 4 2
Third Quarter .................................. 3 1/2 1 5/8
Fourth Quarter ................................. 5 2 1/2
1995
First Quarter .................................. 5 3/8 3 7/16
Second Quarter ................................. 9 3/8 5
Third Quarter .................................. 17 8 3/8
Fourth Quarter ................................. 16 3/8 12
1996
First Quarter .................................. 21 3/8 13 1/4
Second Quarter.................................. 28 17
Third Quarter (through July 31)................. 26 7/8 15 3/4
On July 31, 1996, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $18 1/4. As of July 31, 1996, there were 300
owners of record of Common Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, and as adjusted to give effect to the sale by the Company of the
1,250,000 shares of Common Stock offered hereby (assuming a public offering
price of $18.25 per share) and the receipt of the net proceeds therefrom. The
following table should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this Prospectus. See
"Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------
Actual As Adjusted
------------ ------------
(In thousands)
<S> <C> <C>
Short-term debt.............................................. $ -- $ --
Long-term debt............................................... 1,000(1) 1,000
Stockholders' equity:
Preferred Stock, $.01 par value per share;
10,000,000 shares authorized; none issued................ -- --
Preferred Stock, Series A Junior Participating,
$.01 par value per share; 500,000 shares authorized;
none issued ............................................. -- --
Common Stock, $.01 par value per share;
50,000,000 shares authorized;
10,705,452 shares issued and outstanding, actual;
11,955,452 shares issued and outstanding,
as adjusted (2).......................................... 107 120
Additional paid in capital ................................ 46,356 67,443
Deficit ................................................... (25,609) (25,609)
Subscription receivable ................................... (42) (42)
------- -------
Total stockholders' equity .............................. 20,812 41,912
------- -------
Total capitalization................................. $21,812 $42,912
======= =======
</TABLE>
- ------------
(1) Includes the Company's guarantee of up to $1.0 million of its former German
subsidiary's revolving credit facility. See Note H of Notes to Consolidated
Financial Statements of the Company.
(2) Does not include 1,226,805 shares of Common Stock issuable upon the
exercise of options outstanding as of June 30, 1996 under the Company's
stock option plans.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any such dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to finance the growth and
development of its business. Any future determination to pay dividends will be
at the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and
other operating information of the Company. The selected consolidated financial
data for the five years ended December 31, 1995 are derived from the
consolidated financial statements of the Company which have been audited by
Ernst & Young LLP, independent auditors. The consolidated financial data for the
six month periods ended June 30, 1995 and 1996 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of its results of operations for
these periods. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1996. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the consolidated financial statements, related notes and other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- ------- ------- -------
(In thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ..................... $19,527 $24,572 $31,265 $40,567 $52,442 $24,929 $31,305
Costs and operating expenses:
Costs of product sales
and services.............. 8,462 11,833 15,970 19,688 25,253 12,494 17,359
Selling, general and
administrative............ 8,654 10,911 12,717 15,967 19,145 8,877 9,613
Research and development ... 5,079 6,667 7,852 6,480 4,143 2,394 --
Restructuring charge ....... -- -- -- 1,684 -- -- --
------- ------- ------- ------- ------- ------- -------
Total costs and operating
expenses.................... 22,195 29,411 36,539 43,819 48,541 23,765 26,972
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before interest
income and minority interest (2,668) (4,839) (5,274) (3,252) 3,901 1,164 4,333
Interest income .............. 718 998 549 306 528 213 367
Minority interest in net loss
of consolidated subsidiary.. 359 166 336 218 -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations....... (1,591) (3,675) (4,389) (2,728) 4,429 1,377 4,700
Income (loss) from
discontinued operations..... -- 26 (188) (4,545) -- -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes................ (1,591) (3,649) (4,577) (7,273) 4,429 1,377 4,700
Income taxes ................. -- -- -- -- 219 69 384
------- ------- ------- ------- ------- ------- -------
Net income (loss) ............ $ (1,591) $ (3,649) $ (4,577) $ (7,273) $ 4,210 $ 1,308 $ 4,316
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common
and common equivalent
share from:
Continuing operations .... $ (.20) $ (.37) $ (.44) $ (.27) $ .39 $ .13 $ .38
Discontinued operations .. -- -- (.02) (.46) -- -- --
------- ------- ------- ------- ------- ------- -------
Total ................ $ (.20) $ (.37) $ (.46) $ (.73) $ .39 $ .13 $ .38
======= ======= ======= ======= ======= ======= =======
Weighted average common and
common equivalent
shares outstanding.......... 8,085 9,889 9,904 9,958 10,768 10,256 11,306
Operating Data:
Wound care facilities at
end of period............... 34 42 56 63 84 71 99
Number of new patients ....... 8,337 11,508 16,235 22,529 30,023 14,356 18,426
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------- June 30,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ......................... $ 24,410 $ 19,128 $ 11,709 $ 7,267 $ 12,575 $ 17,444
Total assets ............................ 32,459 29,074 25,278 18,592 25,030 30,185
Long-term debt (including capital
lease obligations)..................... 343 202 515 1,254 1,198 1,120
Deficit.................................. (18,636) (22,285) (26,862) (34,135) (29,925) (25,609)
Stockholders' equity .................... 25,057 21,439 16,837 9,778 15,611 20,812
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company's principal business is the delivery of chronic wound care
services through its nationwide network of Wound Care Centers located in or near
acute care hospitals. Substantially all of the Company's revenues are currently
generated under its contracts with acute care hospitals for the management of
chronic wound care programs and the production of Procuren. The Company
currently markets two types of Wound Care Center management contracts to
hospitals: a management model and an "under arrangement" model.
In the management model, the Company provides management and support
services for a chronic wound care facility owned or leased by the hospital and
staffed by employees of the hospital, and generally receives a fixed monthly
management fee and a variable case management fee. In the "under arrangement"
model, the Company provides management and support services, as well as the
clinical and administrative staff, for a chronic wound care facility owned or
leased by the hospital, and generally receives fees based on the services
provided to each patient. In both models, physicians remain independent, and the
Company recruits and trains the physicians and staff associated with the Wound
Care Center. In addition, in both models, the Company receives fees for the
production of Procuren based on utilization.
Of the 90 hospital outpatient Wound Care Centers in operation as of June
30, 1996, 78 were management model Wound Care Centers, and 12 were "under
arrangement" model Wound Care Centers. The Company's fees under its management
contracts with acute care hospitals are paid by the hospitals directly. See
"Business--Third Party Reimbursement."
The Company is currently expanding its chronic wound care operations into
new health care delivery settings, including inpatient facilities and
freestanding Wound Care Centers owned and operated by the Company. Although
these new models accounted for less than 2% of the Company's revenues in the
first six months of 1996, the Company anticipates that the percentage of its
revenues attributable to these and other new models will increase in the future
as the Company expands its services across the continuum of care for wound
management. These new models are still in the development phase; however, the
Company anticipates that the nature of the revenues produced by and risks
associated with these new models may not be the same as those associated with
its current business.
Business Restructuring and Realignment
During 1994, the Company realigned its business strategy to focus on
developing and expanding its growing wound care business while narrowing the
focus and scope of research and development of new biopharmaceutical products.
The primary goal of the Company's new strategy is to be profitable and enhance
the Company's long term growth potential by devoting financial and
organizational resources to expand its national network of Wound Care Centers.
In order to ensure that sufficient resources were available to pursue this
strategy, a restructuring of Company activities was implemented. The
restructuring included a significant reduction in research and development
activities, including the termination of 15 research personnel and the
termination of outside research contracts related to new drug discovery efforts.
Additionally, the Company reduced its European development activities with the
termination of four people responsible for the development of strategic
alliances for future products. These changes enabled the Company to
significantly reduce research and development expenditures from $7.9 million in
1993 to $4.1 million in 1995. The 1994 restructuring also included the
discontinuation of the Company's business of establishing a wound care program
in a comprehensive outpatient rehabilitation facility and the write-off of
receivables related to this business.
In the Company's continuing effort to focus on its wound care service
business, during the second quarter of 1995 the Company instituted a further
realignment of its business activities which included the discontinuation of all
new product research and development. The Company's research and development
activities are now committed to the technical support of Procuren. Additionally,
the Company completed the divestiture of its European operations with the sale
of its majority-owned German subsidiary.
Effective January 1, 1994, the Company divested a wholly-owned subsidiary,
UltraMed, Inc. ("UltraMed"), through the sale of UltraMed's outstanding capital
stock. As a result, financial statements for 1993 have been restated to account
for UltraMed's financial results as discontinued operations. The following
discussion, including amounts and percentages, reflect only the Company's
continuing operations, except as otherwise noted.
16
<PAGE>
Results of Operations
The following table shows the results of operations of the Company as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------ --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues ............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Costs of product sales and services ................ 51.1 48.5 48.2 50.1 55.5
Selling, general and administrative................. 40.7 39.4 36.5 35.6 30.7
Research and development ........................... 25.1 16.0 7.9 9.6 --
Restructuring charge ............................... -- 4.2 -- -- --
----- ----- ----- ----- -----
Total costs and operating expenses ........... 116.9 108.0 92.6 95.3 86.2
Interest income and minority interest in net loss
of consolidated subsidiary.......................... 2.8 1.3 1.0 0.1 1.2
Income (loss) from continuing operations.............. (14.0) (6.7) 8.4 5.5 15.0
</TABLE>
First Six Months 1995 vs. First Six Months 1996
The Company's revenues increased from $24.9 million in the first six months
of 1995 to $31.3 million in the first six months of 1996, a 26% increase. The
increased revenue is primarily attributable to the operation of 71 wound care
facilities at the end of the first six months of 1995 compared with 99 at the
end of the first six months of 1996 and a 12% increase in revenues at existing
wound care facilities related to higher patient volume. Total new patients to
the wound care facilities increased 28% from 14,356 in the first six months of
1995 compared to 18,426 in the first six months of 1996. The total number of
patients receiving Procuren therapy increased 13% from 3,360 in the first six
months of 1995 compared to 3,788 in the first six months of 1996; however, the
percentage of patients receiving Procuren decreased from 23% in the first six
months of 1995 to 21% in the first six months of 1996. The Company believes that
this decrease is attributable primarily to an increase in the percentage of less
severe chronic wounds being treated at the Company's Wound Care Centers, for
which physicians are less likely to prescribe Procuren, as well as a lack of
available reimbursement for Medicare patients. The Company believes that this
shift in the severity of the wounds treated at a Wound Care Center occurs as the
local medical community becomes familiar with the services offered by the Wound
Care Center and refers a broader range of chronic wound patients to the Wound
Care Center for treatment. The Company anticipates that the percentage of
patients receiving Procuren will continue to decline gradually in the future.
Costs of product sales and services increased from $12.5 million in the
first six months of 1995 to $17.4 million in the first six months of 1996, a 39%
increase. The first six months of 1996 includes $1.0 million of technical
service costs which were reported as research and development expenses for the
first six months of 1995. Excluding technical services costs, the increase in
cost of product sales and services from the first six months of 1995 to the
first six months of 1996 was 31%. The increase is attributable to additional
staffing and operating expenses of approximately $2.1 million associated with
the operation of 28 additional wound care facilities at the end of the first six
months of 1996, as well as increased volume at existing wound care facilities.
Additionally, these 28 facilities include four freestanding Wound Care Centers
and six additional under arrangement Wound Care Centers at which the services
component of costs is higher than at the Company's other facilities due to the
additional clinical staffing and expenses that these models require. As compared
with the first six months of 1995, the higher services components at these
facilities accounted for an additional $0.7 million of the increase in product
costs and services for the first six months of 1996. As a percentage of
revenues, costs of product sales and services (excluding technical services) was
50% in the first six months of 1995 compared with 52% in the first six months of
1996. The increase is attributable to new Wound Care Centers which include a
higher service component.
Selling, general and administrative expenses increased from $8.9 million in
the first six months of 1995 to $9.6 million in the first six months of 1996, an
8% increase. The increase is attributable to additional staffing and operating
expenses of approximately $0.8 million associated with the growth in the wound
care business particularly related to field support departments, offset by a
$0.5 million decrease in expenses related to European operations which were
discontinued in the second quarter of 1995. As a percentage of revenues,
selling, general and administrative expenses were 36% in the first six months of
1995 compared with 31% in the first six months of 1996. The decrease
17
<PAGE>
is attributable to the discontinuation of the European operations as well as the
ability of the Company to obtain leverage by spreading the costs of its overhead
structure over a broader revenue base.
Research and development expense was $2.4 million for the first six months
of 1995. The Company did not incur any research and development expenses in the
first six months of 1996 since it discontinued all new product research and
development in the second quarter of 1995. Technical service costs associated
with the support of Procuren are classified as a cost of product sales.
Net income improved from $1.3 million or $.13 per share in the first six
months of 1995 to $4.3 million or $.38 per share in the first six months of
1996. The increase in earnings of $3.0 million is primarily attributable to
savings of approximately $1.4 million related to the discontinuation of new
product research and development, an improvement in operating margins associated
with the revenue growth and economies of scale achieved from market growth and
the termination of European operations.
Fiscal Year 1994 vs. Fiscal Year 1995
The Company's revenues increased from $40.6 million in 1994 to $52.4
million in 1995, a 29% increase. The increase in revenues in 1995 over 1994 is
primarily attributable to the operation of 84 wound care facilities at the end
of 1995 compared with 63 at the end of 1994 and a 13% increase in revenues at
existing wound care facilities related to volume increases. Total new patients
to the wound care facilities increased 33% from 22,529 in 1994 compared to
30,023 in 1995. The total number of new patients receiving Procuren therapy
increased 16% from 5,899 in 1994 compared to 6,854 in 1995; however, the
percentage of patients receiving Procuren decreased from 26% in 1994 to 23% in
1995. The Company believes that this decrease occurs as the local medical
community becomes familiar with the services offered by a Wound Care Center and
refers a broader range of chronic wound patients to the Wound Care Center for
treatment, including more patients with less severe wounds which are less likely
to be treated with Procuren, as well as a lack of available reimbursement for
Medicare patients.
Costs of product sales and services increased from $19.7 million in 1994 to
$25.3 million in 1995, a 28% increase. Compared to 1994, the increase is
attributable to additional staffing and operating expenses of approximately $4.8
million associated with the operation of the additional 21 wound care facilities
in 1995 and increased volume at existing wound care facilities. Additionally,
the operation of an additional five Procuren production facilities and volume
increases at existing production facilities increased costs approximately $0.6
million. As a percentage of revenues, costs of product sales and services was
49% in 1994 compared to 48% in 1995. The decrease is due to the economies of
scale associated with the revenue growth.
Selling, general and administrative expenses increased from $16.0 million
in 1994 to $19.1 million in 1995, a 20% increase. The increase is primarily
attributable to additional staffing and operating expenses of approximately $2.3
million associated with the growth in the wound care business particularly
related to field support departments. Additionally, approximately $0.5 million
of the increase is attributable to provisions recorded related to the Company's
guarantee of the obligations of UltraMed. See Note K of Notes to Consolidated
Financial Statements of the Company. Further, legal expenses increased $0.4
million related to legal proceedings, increase in contracting issues and general
corporate matters. As a percentage of revenues, selling, general and
administrative expenses were 39% in 1994 compared to 37% in 1995. The decrease
reflects the Company's ability to obtain leverage by spreading the costs of its
overhead structure over a broader revenue base.
Research and development expenses decreased from $6.5 million in 1994 to
$4.1 million in 1995, a 36% decrease. The decrease was attributable to the
corporate restructuring of research and development implemented in 1994,
including the discontinuation of new biopharmaceutical drug discovery efforts
resulting in a reduction in staffing and operating expenses of approximately
$1.7 million. Additionally, during 1995 the Company implemented a further
realignment of its research and development activities which included
discontinuation of the CT-102 and CT-112 product development programs. The
Company's product development activities are now committed to the technical
support of Procuren.
Income (loss) from continuing operations improved from a $2.7 million loss
in 1994 to net income of $4.4 million in 1995. The $7.1 million improvement was
attributable to a reduction in research and development of $2.3 million, a
restructuring charge in 1994 totalling $1.7 million and an improvement in
operating margin associated with the revenue growth and economies of scale
achieved from market growth.
18
<PAGE>
Fiscal Year 1993 vs. Fiscal Year 1994
The Company's revenues increased from $31.3 million in 1993 to $40.6
million in 1994, a 30% increase. The increase in revenues was primarily
attributable to the operation of 56 wound care facilities in 1993 compared with
63 in 1994 and a 15% increase in revenues at existing wound care facilities.
Total new patients to the wound care facilities increased 39% from 16,235 in
1993 compared to 22,529 in 1994. The total number of new patients receiving
Procuren therapy increased 17% from 5,050 in 1993 compared to 5,899 in 1994;
however, the percentage of patients receiving Procuren decreased from 31% in
1993 to 26% in 1994. The Company believes that this decrease occurs as the local
medical community becomes familiar with the services offered by a Wound Care
Center and refers a broader range of chronic wound patients to the Wound Care
Center for treatment, including more patients with less severe wounds which are
less likely to be treated with Procuren.
Costs of product sales and services increased from $16.0 million in 1993 to
$19.7 million in 1994, a 23% increase. The increase was attributable to
additional staffing and operating expenses of approximately $3.0 million
associated with the operation of seven additional wound care facilities and
increased volume at existing wound care facilities. Additionally, increased
staffing and volume increases at existing production facilities increased costs
approximately $0.7 million. As a percentage of revenues, costs of product sales
and services was 51% in 1993 compared to 49% in 1994. The decrease was due to
the economies of scale associated with the revenue growth.
Selling, general and administrative expenses increased from $12.7 million
in 1993 to $16.0 million in 1994, a 26% increase. The increase was primarily
attributable to staffing and operating expenses of approximately $0.9 million
associated with the growth in the wound care business particularly related to
field support departments, increased costs of approximately $0.8 million related
to European development activities prior to the restructuring and an increase in
legal costs of approximately $0.4 million associated with the Company's legal
proceedings. Additionally, the Company recorded approximately $0.7 million in
provisions related to its guarantee of the obligations of UltraMed. See Note K
of Notes to the Consolidated Financial Statements of the Company. As a
percentage of revenues, selling, general and administrative expenses were 41% in
1993 compared to 39% in 1994. The decrease reflects the Company's ability to
obtain leverage by spreading the costs of its overhead structure over a broader
revenue base.
Research and development expenses decreased from $7.9 million in 1993 to
$6.5 million in 1994, a 17% decrease. The decrease was attributable to the
corporate restructuring of research and development implemented in June 1994,
including the discontinuation of new biopharmaceutical drug discovery efforts
resulting in a reduction of approximately $1.1 million in staffing and operating
expenses. Additionally, the completion of various preclinical studies of CT-112
and a reduction in the outside clinical investigator costs associated with
CT-102 clinical studies in the United States contributed to the reduction.
During the second quarter of 1994 the Company announced a restructuring of
the Company to focus on developing and expanding its growing wound care business
while narrowing the focus and scope of research and development activities. As a
result of this restructuring, the Company recorded a charge of $1.7 million. The
restructuring charge included approximately $0.5 million for employee severance
and related costs, $0.4 million related to property and equipment write-offs,
$0.4 million related to research contract terminations, $0.1 million in
provisions for leases and other facility obligations and $0.1 million for legal
and other professional fees associated with the restructuring and reorganization
of the Company's operations. Additionally, a charge of $0.2 million was recorded
for the provision for an uncollectible receivable associated with the Company's
efforts to establish a wound care program in a comprehensive outpatient
rehabilitation facility. The employee severance costs principally covered the
termination of 15 persons in research and development and four persons employed
in its European development activities. The research contracts terminated in the
restructuring were with outside research firms and related to the Company's new
drug discovery efforts which were terminated.
Net loss from continuing operations decreased from $4.4 million in 1993 to
$2.7 million in 1994. The $1.7 million improvement was attributable to increased
revenues and the associated improvement in operating margins, as well as the
impact the restructuring had since its implementation.
Interest income decreased from $0.5 million in 1993 to $0.3 million in
1994. The decrease was due to lower quarterly balances of cash, cash equivalents
and marketable securities held-to-maturity.
Loss from discontinued operations included a second quarter charge of $4.5
million principally related to the impairment of the note receivable recorded by
the Company at December 31, 1993 in connection with its sale of its former
subsidiary, UltraMed. Due to changes in Medicare reimbursement rates and the
U.S. Department of Justice
19
<PAGE>
action relating to the lawsuit discussed in Note J of Notes to the Consolidated
Financial Statements of the Company, the business of UltraMed was adversely
affected. The Company believes that in view of these events, the likelihood of
collectibility of the promissory note due from UltraMed was remote.
Liquidity and Capital Resources
Working capital was $12.6 million at December 31, 1995 and $17.4 million at
June 30, 1996. Total cash, cash equivalents and marketable securities
held-to-maturity as of June 30, 1996 was $15.2 million and was invested
primarily in highly liquid money market funds, commercial paper and government
securities. The ratio of current assets to current liabilities increased from
2.5:1 at December 31, 1995 to 3.1:1 at June 30, 1996. The increase in working
capital and improvement in the ratio of current assets to current liabilities
was primarily attributable to the net income for the six months ended June 30,
1996.
Cash flows provided by operations for 1995 and the first six months of 1996
totalled $5.9 million and $2.8 million, respectively, primarily attributable to
the net income for the period. Cash flows used in investing activities for 1995
totalled approximately $8.8 million primarily attributable to the excess of
purchases of marketable securities held to maturity over sales of $6.6 million
and capital expenditures including furniture, equipment and leasehold
improvements of $2.0 million. Cash flows used in investing activities during the
first six months of 1996 totalled $1.2 million primarily attributable to capital
equipment expenditures and purchases of marketable securities. Cash flows
provided by financing activities totalled $1.3 million for 1995 and $0.8 million
during the first six months of 1996 primarily attributable to proceeds from the
exercise of stock options.
During 1995 the Company experienced an increase of $1.5 million in accounts
receivable primarily due to the increase in revenues, although the average
number of days receivables were outstanding declined from 59 days in 1994 to 53
days in 1995. Further, the Company's accounts payable and accrued expenses
increased $1.3 million primarily attributable to the increase in operating
expenses.
During the six months of 1996, the Company experienced a $1.7 million
increase in accounts receivable primarily due to the increase in revenues,
although the average number of days receivables were outstanding declined from
53 days as of December 31, 1995 to 52 days as of June 30, 1996. Further,
compared to December 31, 1995, the Company's accounts payable and accrued
expenses increased $32,000 as of June 30, 1996.
In May 1995, the Company sold its 62% interest in its majority owned German
subsidiary to the subsidiary's general manager. In connection with the sale, the
Company made a working capital commitment of 0.5 million Deutsche Mark (dm)
which was paid in 1995. Additionally, the Company is entitled to future
contingent payments of 30% of the subsidiary's profits up to 0.5 million dm.
Additionally, there are contingent payments of approximately 1.0 million dm due
the Company representing previously advanced intercompany loans. Since the
subsidiary had a history of operating losses, the Company has not recorded any
amounts due from the subsidiary. Further, the Company remains a guarantor of the
former subsidiary's revolving credit facility of 1.4 million dm (approximately
$1 million) and is obligated for any related interest payments.
At December 31, 1995, the Company had available approximately $28 million
of net operating loss carryforwards and research credits for federal income tax
purposes. Pursuant to the Tax Reform Act of 1986, the Company believes that the
use of these net operating loss carryforwards in any particular year may be
limited as a result of changes in ownership which occurred in prior periods. See
Note G of Notes to Consolidated Financial Statements of the Company.
The Company's longer term cash requirements include working capital for the
further expansion of its wound care business. Other cash requirements are
anticipated for capital expenditures in the normal course of business. The
Company expects that, based on its current business plan, its existing cash,
cash equivalents and marketable securities will be sufficient to satisfy its
currently anticipated working capital needs. The Company anticipates that the
net proceeds of the shares offered hereby will be sufficient to finance the
development of (i) new wound care programs and (ii) systems to support the
Company's managed care marketing capabilities. The effects of inflation and
foreign currency translation risks are considered immaterial.
20
<PAGE>
Quarterly Results of Operations
The table below sets forth certain selected unaudited financial information
of the Company for the quarters indicated.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
Mar.31 June30 Sept.30 Dec.31 Mar.31 June30 Sept.30 Dec.31 Mar.31 June30
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $ 8,891 $ 9,566 $10,535 $11,575 $12,007 $12,922 $13,322 $14,191 $14,917 $16,388
Costs and operating expenses:
Costs of product sales and
services.................... 4,658 4,780 5,059 5,191 6,111 6,158 6,341 6,643 8,335 9,024
Selling, general and
administrative.............. 3,467 3,763 3,883 4,854 4,247 4,890 4,882 5,126 4,752 4,861
Research and development ..... 1,743 1,889 1,504 1,344 1,198 1,196 921 828 -- --
Restructuring charge ......... -- 1,684 -- -- -- -- -- -- -- --
Income (loss) from continuing
operations before interest
income and minority interest
and taxes..................... (977) (2,550) 89 186 451 713 1,178 1,594 1,830 2,503
Net income (loss) from continuing
operations.................... (875) (2,313) 185 275 514 794 1,284 1,618 1,873 2,443
Net income (loss) per share
from continuing operations ... (.09) (.23) .02 .03 .05 .08 .12 .14 .17 .21
Weighted average common and
common equivalent shares
outstanding................... 9,909 9,928 10,021 10,081 10,182 10,391 11,065 11,163 11,315 11,382
</TABLE>
21
<PAGE>
BUSINESS
General
Curative Health Services, Inc. is a leading disease management company in
the chronic wound care market. Currently, the Company manages, on behalf of
hospital clients, a nationwide network of Wound Care Centers that offers a
comprehensive range of services which enable the Company to provide customized
wound care. The Company's Wound Management Program consists of diagnostic and
therapeutic treatment regimens which are designed to meet each patient's
specific wound care needs on a cost effective basis. The Company's treatment
regimens are based on critical pathways designed for wound healing. The Company
has a proprietary database of patient outcomes that the Company has collected
since 1988 containing approximately 100,000 patient records which indicate an
overall healing rate of approximately 80% for patients completing therapy. The
Company's Wound Care Center network consists of 90 outpatient clinics located on
or near campuses of acute care hospitals in 29 states. The Company is developing
new service models for other health care delivery settings and currently manages
five wound care programs at subacute and long term acute care facilities and
operates four freestanding Wound Care Centers.
The Company believes that the high degree of specialization and expertise
offered by the Wound Care Centers provide benefits: (i) to patients through
superior wound care, thus enhancing their quality of life, in many cases,
allowing them to avoid amputation; (ii) to affiliated hospitals by enabling them
to differentiate themselves from their competitors through better wound care
treatment outcomes, to reduce costs by decreasing inpatient lengths of stay and
to increase revenue through the introduction of new patients; (iii) to
affiliated physicians by providing greater access to patients; and (iv) to
insurers and managed care providers by offering a cost effective alternative to
traditional wound care.
Industry
Market Overview. Chronic wounds are common in patients with diabetes and
venous stasis disease, as well as in patients who are immobilized and afflicted
with pressure sores. A chronic wound generally is a wound which shows no signs
of significant healing in four weeks or has not healed in eight weeks. The
healing of a wound is dependent upon adequate blood flow to stimulate new cell
growth and combat infection. When adequate blood flow does not occur, the
healing process is retarded, often resulting in a chronic wound that can last
for months or years. Without effective treatment, a chronic wound may lead to
more severe medical conditions, such as infection, gangrene and amputation,
which are costly to payors and impede the quality of life for the patient.
According to Chronic Wound Care: A Clinical Source Book for Healthcare
Professionals (Health Management Publications, 1990), it is estimated that at
least three million people suffer from chronic wounds in the United States. Of
the three million people with chronic wounds, an estimated 1.5 million have
pressure sores, over 700,000 have diabetic ulcers, and over 600,000 suffer from
venous stasis ulcers. Diabetic ulcers are responsible for 60,000 limb
amputations each year, accounting for more than half of all such procedures not
related to trauma. Venous stasis disease and pressure sores often afflict the
elderly, who constitute the most rapidly growing segment of the U.S. population
and account for a disproportionately large share of total U.S. heath care
expenditures. It is estimated that the wound care segment of the U.S. health
care industry generated $2 billion in expenditures in 1994. It is also
anticipated that the wound care market will continue to grow due to the aging
population and the increasing incidence of health disorders, such as diabetes,
which may lead to chronic wounds.
Traditional Approach to Chronic Wound Care. Traditional chronic wound care
treatment, which is typically administered by a primary care physician, relies
principally on cleansing and debriding the wound, controlling infection with
antibiotics and protecting the wound. For example, topical or oral antibiotics
are administered to decrease the bacterial count in the wound, protective
dressings are used to decrease tissue trauma and augment repair and various
topical agents are applied that chemically cleanse the wound and remove wound
exudate. These passive treatments do not directly stimulate the underlying wound
healing process. In many cases, the patient may have to see a number of health
care professionals before effective treatment is received. In addition, under
this traditional care model, patients must manage their own care, which often
leads to non-compliance and treatment failure which may lead to infection,
gangrene and amputation. Although wound care programs have begun to evolve to
more specialized and aggressive treatment regimens, the Company believes that a
significant medical need and market opportunity exists for products and services
that improve and accelerate the wound healing process.
22
<PAGE>
The Curative Approach to Chronic Wound Care
The Company's Wound Management Program is a comprehensive array of
diagnostic and therapeutic treatment regimens with all the components of care
necessary to treat chronic wounds. The Company's Wound Management Program is
administered primarily through the Company's nationwide network of Wound Care
Centers. The Company believes the Wound Management Program provides a better
approach to chronic wound management than the traditional approach, which the
Company believes lacks comprehensive wound programs, effective technology,
positive outcomes and cost efficiency. Each Wound Management Program offers its
patients a multi-disciplinary team of health care professionals, including a
medical director, surgeon, nurse, case manager, nutritionist and
endocrinologist.
In most cases, patients arriving at the Company's Wound Care Centers have
been treated with traditional wound healing techniques, but continue to suffer
from chronic wounds. In some cases, patients come to a Wound Care Center after
they have received an opinion from their primary physician that limb amputation
is required. Upon the commencement of treatment under the Company's Wound
Management Program, medical personnel conduct a systematic diagnostic assessment
of the patient. Specialized treatment protocols are then established for the
patient, based on the underlying cause of the wound and the unique status of the
patient. After the assessment phase, the course of treatment in the Wound
Management Program may include revascularization, infection control, wound
debridement, growth factor therapy, skin grafting, nutrition, protection
devices, patient education, referrals, and effective management of care through
patient/provider communications.
To measure the effectiveness of the Company's Wound Management Program, the
Company has developed a functional assessment scoring system to measure the
healing of a wound. Under this system, a chronic wound is considered healed when
(i) it is completely covered by epithelium (i.e., a membranous cellular tissue
that covers and protects a wound as it heals), (ii) maturing skin is present in
the wound, (iii) there is minimal drainage from the wound, (iv) the wound
requires only a protective dressing and (v) the limb involved is functional. The
Company has a proprietary database of patient outcomes that the Company has
collected since 1988 containing approximately 100,000 patient records which
indicate an overall healing rate of approximately 80% for patients completing
therapy.
A unique aspect of the Company's Wound Management Program is the use of
Procuren, the Company's proprietary wound healing agent which is used to treat
approximately 20% of patients. Procuren is a naturally occurring complex mixture
of several growth factors that promotes the growth of skin, soft tissue and
blood vessels. Procuren is produced by stimulating the release of growth factors
from platelets contained in the patient's own blood. Blood is taken from the
patient at the treatment center and then sent to a Company-operated blood
processing facility located in the same state where the patient's blood was
drawn. To produce Procuren, the Company separates the platelets from the
remainder of the blood sample. Thrombin, a substance in the body that is active
in the wound healing process, is added to the platelets, causing the platelets
to release growth factors. The platelet shells are discarded and the growth
factors are diluted and placed in a buffered solution which is frozen until
used. When required as part of the patient's wound care treatment program,
Procuren is applied topically to the wound area by soaking a gauze dressing in
the Procuren solution and covering the wound area with the gauze. Procuren, as
part of a comprehensive treatment algorithm, has been used to treat over 31,000
patients to date. The Company believes that Procuren stimulates a normal wound
healing response in patients with chronic wounds in much the same way as the
body naturally initiates healing.
Company-sponsored studies suggest that the use of Procuren as part of the
Company's Wound Management Program is both efficacious and cost-effective. For
example, a Company-sponsored retrospective study of patients with diabetic
ulcers (who tend to have the most severe chronic wounds) published by CP Fylling
and PC McKeown in 1990 found that the average charges for a conventional
treatment program were $19,000 as compared to $14,000 for a specialized wound
management program that included the use of Procuren. In addition to costing
less, the specialized program had a healing rate of 79% as compared to 24% for
patients enrolled in the conventional treatment program. Furthermore, 60% of the
conventionally treated patients required amputations at the end of the study
compared with only 19% in the specialized group of patients.
23
<PAGE>
Strategy
The Company's objective is to enhance its position as a leading disease
management company in the chronic wound care market. The Company's growth
strategy is to continue to improve and refine the Wound Management Program while
broadening its delivery models to cover the entire continuum of care for wound
management. Key elements of this strategy include:
Continue to Develop the Company's Nationwide Network of Outpatient Wound
Care Centers. The Company intends to continue to establish additional outpatient
Wound Care Centers on or near the campuses of acute care hospitals. Despite the
Company's rapid growth from 32 outpatient centers in 1991 to 90 outpatient
centers as of June 30, 1996, the Company believes the opportunity for further
growth remains substantial. The Company has identified over 300 additional
markets in the United States which the Company believes have the population
necessary to support a dedicated wound care program. The Company believes
hospitals are continually seeking low cost, high quality solutions to wound
management such as those provided by the Company. In addition, the Company
believes it enables its hospital clients to differentiate themselves from their
competitors through better wound care treatment outcomes, reduced costs due to
decreased inpatient lengths of stay and increased revenue through the
introduction of new patients. As a result, the Company believes there is a
significant opportunity for the Company to continue to expand its Wound Care
Center operations through affiliation with acute care hospitals.
Develop New Service Models to Enhance Market Penetration. The Company is
actively developing new service models in new health care delivery settings such
as inpatient programs for subacute and long term care facilities (e.g., nursing
homes and long term acute care hospitals) and freestanding outpatient Wound Care
Centers. The Company currently operates four freestanding outpatient Wound Care
Centers all of which have opened since October 1995, and five inpatient
programs, including two subacute care nursing home-based programs, one subacute
care hospital-based program and two long term acute care hospital-based
programs, all but one of which has opened since October 1995. Ultimately the
Company may also expand its service models to physician offices and the home.
Pressure sores, the most common form of chronic wound, usually occur among
nursing home, subacute care and home patients due to the sedentary lifestyle
associated with those care settings. As the Company further develops its
inpatient service models, the Company believes it will become more capable of
penetrating the large pressure sore market. The freestanding service model
allows the Company to strategically grow its business through select target
marketing and enter markets where a suitable partner is not available.
Furthermore, the Company believes the freestanding model gives the Company
greater control over healing outcomes and the cost of services, both of which
are important when working with managed care providers.
Provide a Comprehensive Managed Care Product. In addition to providing new
revenue opportunities, the Company believes its ability to provide its services
as a comprehensive managed care product in a number of settings will increase
its attractiveness to managed care payors seeking to provide a continuum of care
while reducing risk. With its Wound Management Program and increasing presence
in multiple health care delivery settings, the Company can offer managed care
payors a shared risk relationship which the Company believes will provide better
patient healing outcomes and more cost-effective services for subscribers.
Enhance the Company's Wound Management Program. The Company currently
offers a unique Wound Management Program which includes assessment, vascular
studies, revasularization, infection control, wound debridement, growth factor
therapy, skin grafting, nutrition, protection devices, patient education,
referrals and effective management of care through patient/provider
communications. In addition, the Company is continually exploring and seeking
advances in wound care management services and products which could enhance its
current Wound Management Program. The Company is actively pursuing such advances
through the continuous development of its current services, and the
consideration of acquisition opportunities and co-marketing arrangements with
other providers of wound care products and services.
Expand Into Other Disease Management Areas. Longer term, the Company is
considering capitalizing on its disease management expertise by expanding its
services into other disease management areas to meet the growing continuum of
health care needs of patients and providers. The Company believes that there is
a significant market potential for the delivery of other disease management
services through its existing network of Wound Care Centers. The possibilities
for expansion of the Company's disease management services include the treatment
of chronic wound related diseases such as diabetes, as well as non-chronic wound
related diseases such as cardiovascular disorders.
24
<PAGE>
Wound Care Operations
The Company's wound care operations offer health care providers the
opportunity to create specialty wound care departments designed to meet the
needs of chronic wound patients. The initial focus of the Company's wound care
operations has been hospital outpatient Wound Care Centers. The Company is
currently expanding its programmatic approach to wound care to alternate site
inpatient settings such as subacute and long term acute care inpatient
facilities. In these models the Company has established the wound care programs
as cooperative ventures with health care providers to offer a multi-disciplinary
approach to the treatment of chronic wounds. In addition, the Company is
expanding its market penetration with the establishment of freestanding
outpatient Wound Care Centers.
Hospital Outpatient Wound Care Centers. Outpatient Wound Care Centers,
located on or near the campuses of acute care hospitals, represent the Company's
core business. A typical hospital outpatient Wound Care Center consists of 4,000
square feet of space comprising four to eight exam rooms, a nursing station, and
physician and administrative offices. These Wound Care Centers are designed to
deliver all necessary outpatient services for the treatment of chronic wounds,
with the hospital providing any inpatient care, such as revascularization or
surgical debridement.
The Company currently offers its hospital clients two outpatient Wound Care
Center models: a management model and an "under arrangement" model. The
differences between these two models relate primarily to the employment of the
clinical staff at the Wound Care Center and the basis for the management fees
paid to the Company. In the management model, the only employee of the Company
at the Wound Care Center is the Wound Care Center's Program Director, and the
Company generally receives a fixed monthly managment fee and a variable case
management fee. In the "under arrangement" model, the Company employs all of the
clinical and administrative staff (other than physicians) at the Wound Care
Center and the Company generally receives fees based on the services provided to
each patient. In all other material respects the two models are identical. In
both models, physicians remain independent and the Company recruits and trains
the physicians and staff associated with the Wound Care Center. The physicians
providing services at a Wound Care Center are recruited by the Company primarily
from among the doctors who work at the hospital and practice in related areas.
In addition, in both models the Company develops, manages and provides Procuren
processing services for the Wound Care Center, and the Company's field support
departments provide the staff at each Wound Care Center with clinical oversight,
quality assurance, reimbursement consulting, sales and marketing and general
administrative support services. The terms of the Company's contract with each
hospital are negotiated individually. Generally, in addition to the management
fees described above, the contracts provide for development fees and Procuren
processing fees charged to the hospital based on utilization. In both models,
the hospital and the physician bill the patient for the services provided and
are responsible for seeking reimbursement from insurers or other third party
payors.
The first Wound Care Center opened in 1988 and there are currently 90
hospital outpatient Wound Care Centers in operation in 29 states. The Company
has entered into contracts or letters of intent with five hospitals to open
additional Wound Care Centers. The Company's hospital client base ranges from
medium-sized community-based hospitals to large hospitals affiliated with
national chains and not-for-profit hospitals in local markets. The Company
selects hospital clients based on a number of criteria. A suitable hospital
client typically can accommodate at least 200 inpatient beds, offers services
which complement the Wound Management Program, including physician specialists
in the areas of general, plastic and vascular surgery, endocrinology and
diabetes, is financially stable and has a solid reputation in the community it
serves. Of the Company's 90 current hospital outpatient Wound Care Centers, 78
are management model centers and 12 are "under arrangement" model centers.
At December 31, 1995, the Company had management contracts with 28 acute
care hospitals directly or indirectly owned by Columbia/HCA. These hospitals
collectively accounted for approximately 24% of the consolidated revenues of the
Company for the year ended December 31, 1995 and 28% for the six months ended
June 30, 1996. The Company and Columbia/HCA are currently in discussions
initiated by Columbia/HCA to standardize the management contracts and operating
procedures at the Would Care Centers owned by Columbia/HCA, as well as any Wound
Care Centers to be opened by Columbia/HCA in the future. Representatives of
Columbia/HCA have indicated to the Company that the purpose of the discussions
is to provide easier access to the Company's Wound Management Program and to
enhance wound care services at Columbia/HCA's hospitals. Although the Company
believes that standardizing the management contracts and operating procedures
will ultimately strengthen its relationship with Columbia/HCA, there can be no
assurance these discussions with Columbia/HCA will not result in changes which
would have an adverse impact on the Company's business, financial condition and
results of operations, including, without limitation,
25
<PAGE>
price concessions, contract termination provisions less favorable to the
Company, and increased costs borne by the Company.
Inpatient Wound Care Programs. The Company is addressing the needs of the
inpatient wound care market through the development of inpatient programs. The
Company currently manages inpatient programs including two subacute care nursing
home-based programs, one subacute care hospital-based program and two long term
acute care hospital-based programs in five states and plans to continue to
develop similar inpatient programs. This model is designed to access the segment
of the chronic wound market comprised of non-ambulatory patients in alternate
site inpatient facilities. These patients often have pressure sores resulting
from inactivity. While not typically as severe as diabetic or venous stasis
ulcers, pressure sores represent the largest segment of the chronic wound
market. The training, field support and Procuren processing services provided by
the Company to a facility in connection with an inpatient wound care program are
similar to those provided to the Company's hospital clients in connection with
the hospital outpatient Wound Care Centers. The Company typically manages
between 10 and 20 beds per facility. Under the Company's existing inpatient
contracts, the staff of the inpatient program is employed by the health care
facility and the Company receives management fees on a per patient basis, as
well as Procuren processing fees based on utilization; however, the Company's
inpatient program model is still under development and the terms of its future
inpatient program contracts may not be the same as the existing contracts.
Freestanding Outpatient Wound Care Centers. In the last quarter of 1995,
the Company began to establish freestanding Wound Care Centers in which the
Company is the owner and operator. The Company believes that this delivery model
will allow the Company to expand its market penetration in the outpatient
setting by allowing the Company to strategically penetrate markets without the
constraint of finding a hospital or contracting with competing hospitals. The
Company currently has four freestanding centers in four states and is planning
to continue expansion of this model in select markets. The freestanding Wound
Care Centers resemble standard outpatient facilities or specialized physician
practices. The Company employs the staff of the Wound Care Center and is
responsible for billing patients for all services provided at the Wound Care
Center and for seeking reimbursement from third party payors. To date the
Company has not employed any of the physicians providing services at its
freestanding Wound Care Centers; however, the Company's freestanding Wound Care
Center model is still under development and the Company may employ physicians at
these models in the future.
Procuren Production Facilities. The Company currently produces Procuren in
40 facilities in 29 states, all of which are registered with the FDA as blood
processing facilities. The Company's personnel at these facilities produce
Procuren at the direction of Wound Care Center physicians.
Managed Care Operations
The Company's managed care strategy is currently focused on marketing Wound
Care Center services to local managed care organizations ("MCOs") in concert
with its hospital clients' efforts to promote all hospital-based services to
such MCOs. In those instances where hospital clients are unable to establish
contractual relations with a large local MCO or in those markets where the
Company operates freestanding Wound Care Centers where it would otherwise be
appropriate, the Company seeks to establish relations directly with MCOs. The
Company's contractual arrangements with MCOs, which will vary based upon the
needs of the particular MCO, are expected to provide for the Company to receive
compensation on a fee-for-service, fixed case rate or at-risk capitation basis.
While the Company anticipates that initially most of its managed care contracts
will be fee-for-service or case rate contracts, it expects that at-risk
capitation will eventually become the preferred contracting method for MCOs.
The Company's longer term managed care strategy is to establish a wound
care carve-out product with selected MCOs. The Company has begun to develop
tools to help MCOs assess their current wound care experiences (both clinical
outcomes and costs) against the Company's Wound Management Program in order to
demonstrate that a wound care carve-out product can provide added value. In
order to make itself more attractive to MCOs by offering a broader disease
management program, the Company intends, where appropriate, to align itself with
other disease management companies focused on complementary diseases such as
cardiac care (venous status management) and diabetes. The Company expects that
contracts for a carve-out product will provide at-risk arrangements with MCOs
(i.e., fixed case rates or capitation).
The Company's managed care operations are overseen by a Vice President of
Managed Care. To date, the Company's managed care operations have been limited.
Although the Company or its hospital clients have been reimbursed for wound
treatment by a number of MCOs on a case-by-case basis, the Company currently has
no
26
<PAGE>
contracts that require or incentivize subscribers to use the Company's wound
care services. There can be no assurance that the Company will be able to
successfully expand its managed care operations.
Sales and Marketing
The Company's sales and marketing strategy consists of a two-fold approach
involving the development of new wound care programs as well as the referral of
patients into the operating Wound Care Centers. To accomplish this strategy the
Company has divided the United States into five operating regions each headed by
a Regional Vice President. The sales and marketing effort in each region is
directed by a Regional Sales Manager under the supervision of the Regional Vice
President. The Regional Sales Manager is responsible for the activities of the
Account Executives and Professional Liaisons. The primary job of the Account
Executives is the development of new wound care programs. The Professional
Liaisons are primarily responsible for sales efforts related to community
education directed at physicians and other healthcare professionals, and
increasing patient enrollment at existing Wound Care Centers.
As of June 30, 1996, the sales force consisted of five Regional Sales
Managers, eight Account Executives and 44 Professional Liaisons.
In addition to the above, a sales and marketing plan is developed each year
at each Wound Care Center. The execution of the plan is the responsibility of
the Program Director at the Wound Care Center. The plan details the anticipated
marketing for the year including radio, print and television advertising as well
as professional symposiums. The cost of this plan is generally shared between
the Company and the hospital.
The Company markets the Wound Care Center concept to hospitals as a
therapeutic "Center of Excellence." The Company believes that having a Wound
Care Center can differentiate a hospital from its competitors and can increase
the hospital's revenues through the introduction of new patients, which leads to
an increase in ambulatory surgeries, X-rays, laboratory tests and inpatient
surgeries, such as debridements, vascular surgeries and plastic surgeries. The
Company has demonstrated that Wound Care Centers provide significant incremental
revenues to participating hospitals, and therefore provide an attractive
economic opportunity for hospitals. Potential benefits to treating physicians
include the healing of difficult-to-heal wounds and an expansion of the
physician's practice.
Patents and Proprietary Rights
The Company's success depends in part on its ability to enforce patents,
maintain trade secret protection and operate without infringing on or violating
the proprietary rights of third parties. One U.S. patent has issued, and one
additional application for a patent in the United States has been filed,
relating to the manufacture and use of Procuren for wound care. There can be no
assurance that any pending patent applications will be approved or that any
issued patents will provide the Company with competitive advantages in the
future or will not be challenged by any third parties or, if involved in a
challenge, will be found valid and infringed. Furthermore, there can be no
assurance that others will not design around the patents. The issued U.S. patent
is jointly owned by the University of Minnesota and the Company. The joint
interest of the University of Minnesota is licensed exclusively to the Company
under a paid in full, royalty free arrangement. The U.S. government has a
nonexclusive grant back license under the issued U.S. patent for all government
purposes. The additional pending U.S. application is owned by the Company and is
not subject to the government grant back license.
In addition to patent protection, the Company also relies, in part, on
trade secrets, proprietary know-how and technological advances which it seeks to
protect by measures such as confidentiality agreements with its employees,
consultants and other parties with whom it does business. There can be no
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach, that others will not independently
develop products similar to Procuren or that the Company's trade secrets and
proprietary know-how will not otherwise become known, be independently
discovered by others or found to be unprotected. The Company is aware of a
limited number of physicians who appear to be utilizing an autologous platelet
extract for the treatment of chronic wounds.
The Company has registered the names "Procuren" and "Wound Care Center" as
trademarks in the United States for use in connection with the Company's wound
care operations.
Government Regulation
The Company's Wound Care Centers and the production and marketing of its
products and services are subject to extensive regulation by numerous
governmental authorities in the United States, both federal and state. Although
27
<PAGE>
the Company believes that it is currently in compliance with applicable laws,
regulations and rules, some of such laws are broadly written and subject to
little or no interpretation by courts or administrative authorities. Hence,
there can be no assurance that a third party or governmental agency will not
contend that certain aspects of the Company's operations or procedures are
subject to or are not in compliance with such laws, regulations or rules or that
the state or federal regulatory agencies or courts would interpret such laws,
regulations and rules in the Company's favor. The sanctions for failure to
comply with such laws, regulations or rules could include denial of the right to
conduct business, significant fines and criminal penalties. Additionally, an
increase in the complexity or substantive requirements of such laws, regulations
or rules could have a material adverse effect on the business, financial
position and results of operations of the Company.
The FDA regulates drugs and biologics that move in interstate commerce and
requires that such products receive pre-marketing approval based on evidence of
safety and efficacy. Since Procuren is produced at one of the Company's blood
processing facilities in the state where the Wound Care Center which will
dispense the Procuren is located and so is not intended to be shipped across
state lines, the Company believes, based on the advice of its counsel, that
under current law and regulations, FDA approval is not required for the Company
to distribute and sell Procuren through the Wound Care Centers. The FDA is
currently reassessing its regulation of other autologous and somatic cell
products and has publicly stated that it believes that if any component of a
drug or biological or if any patient receiving such substance moves in
interstate commerce, a sufficient nexus with interstate commerce exists for FDA
to require pre-marketing approval and licensure. While the production of
Procuren includes components that are shipped in interstate commerce, to date
the FDA has not determined that Procuren, as currently prepared, is subject to
licensure or pre-market approval. Although the Company believes interstate
shipment of the final biologic product is required to trigger pre-marketing
approval and licensure, a determination by the FDA to require Procuren to obtain
pre-marketing approval would materially and adversely affect the Company.
Because FDA approval has not been required for Procuren, and state
approvals are generally limited to licensing of facilities, there has been no
independent determination of its efficacy by any governmental entity. If the FDA
were to require submission of a product license application ("PLA") as a
condition for the continued distribution and sale of Procuren, the Company might
have to demonstrate the safety, purity, potency and effectiveness of the product
through extensive clinical trials. Neither the Company nor any third party has
conducted the controlled clinical trials required to establish Procuren's
efficacy. Compliance with the requirements for a PLA is time-consuming and
involves the expenditure of substantial resources. There can be no assurance
that the Company would be able to establish efficacy or to obtain or maintain
the necessary FDA approvals to manufacture and distribute Procuren.
Any change in current regulatory interpretations by or positions of state
officials where the Wound Care Center's are located could adversely affect the
Company's distribution of Procuren within those states. In states where Wound
Care Centers are not currently located, the Company intends to utilize the same
approaches adopted elsewhere for achieving state compliance. However, state
regulatory requirements could adversely affect the Company's ability to
establish Wound Care Centers in such other states.
Various state and federal laws regulate the relationships between providers
of health care services and physicians and other clinicians, including
employment or service contracts, investment relationships and referrals for
certain designated health services. These laws include the fraud and abuse
provisions and referral restrictions of the Medicare and Medicaid statutes,
which prohibit the solicitation, payment, receipt or offering of any direct or
indirect remunerations for the referral of Medicare and Medicaid patients or for
the ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil or criminal
penalties for individuals or entities including exclusion from participation in
the Medicare or Medicaid programs. Several states have adopted similar laws that
cover patients in private programs as well as government programs. Because the
anti-fraud and abuse laws have been broadly interpreted, they limit the manner
in which the Company can operate its business and market its services to, and
contract for services with, other health care providers. No assurance can be
given regarding compliance in any particular factual situation, as there is no
procedure for advisory opinions from government officials.
Additionally, federal and some state laws impose restrictions on
physician's referrals for certain designated health services to entities with
which the physician has a financial relationship. The Company believes its
operations are structured to comply with these restrictions to the extent
applicable. However, there are efforts to expand the scope of these referral
restrictions. Federal legislation is being considered to expand current law from
its application to Medicare and Medicaid business to all payors, and to
additional health services. Certain states are considering
28
<PAGE>
adopting similar restrictions or expanding the scope of existing restrictions.
There can be no assurance that the federal government or other states in which
the Company operates will not enact similar or more restrictive legislation or
restrictions that could under certain circumstances limit the manner in which
the Company can operate its business and have a negative impact on the Company's
business, financial condition and results of operations.
The laws of many states prohibit physicians from sharing professional fees
with non-physicians and prohibit non-physician entities, such as the Company,
from practicing medicine and from employing physicians to practice medicine. The
laws in most states regarding the corporate practice of medicine have been
subjected to limited judicial and regulatory interpretation. The Company
believes its current and planned activities do not constitute prohibited fee
splitting or violate any prohibition against the corporate practice of medicine.
There can be no assurance, however, that future interpretations of such laws
will not require structural or organizational modifications of the Company's
existing business.
Pursuant to the federal Occupational Safety and Health Act, employers have
a general duty to provide a work place for their employees that is safe from
hazard. The U.S. Occupational Safety and Health Administration ("OSHA") has
issued rules relevant to certain hazards that are found in the Company's blood
processing facilities. In addition, OSHA issued a standard in 1992 applicable to
protection of workers from blood-borne pathogens. Failure to comply with this
standard relating to blood-borne pathogens, other applicable OSHA rules or with
the general duty to provide a safe work place could subject the Company to
substantial fines and penalties.
Third Party Reimbursement
The Company, through its wound care operations, provides contractual
management services for fees and sells Procuren to acute care hospitals and
other health care providers. These providers, in turn, seek reimbursement from
third party payors, such as Medicare, Medicaid, health maintenance organizations
and private insurers, including Blue Cross/Blue Shield plans. The availability
of reimbursement from such payors has been a significant factor in the Company's
ability to increase its revenue streams and will be important for future growth.
In addition to hospital outpatient Wound Care Centers which it manages for
its clients, the Company owns and operates freestanding outpatient Wound Care
Centers. With respect to services and products provided through its freestanding
centers, the Company is subject to the risks inherent in third party
reimbursement, including the risks associated with billing third party payors.
As of June 30, 1996, the Company operated four freestanding outpatient Wound
Care Centers which contributed approximately $251,000 or less than 1% of the
Company's revenues for the six months ended June 30, 1996. However, the Company
anticipates that the number of, and amount of revenues attributable to, its
freestanding centers will increase in the future as the Company pursues its
strategy of expanding into new health care delivery settings. See
"Business--Strategy."
Each third party payor formulates its own coverage and reimbursements
decisions. In 1992 the Health Care Financing Administration ("HCFA"), the agency
that administers the Medicare program nationally, published a national coverage
decision denying coverage for Procuren based on its determination that the
safety and efficacy of Procuren had not been established and so the use of
Procuren was not "reasonable and necessary" within the meaning of applicable
law. Procuren sales represent a significant part of the Company's revenues and
earnings and the Company believes that Procuren, as a component of its Wound
Management Program, is a significant component of the Company's services.
Although the Company has not, and the Company believes that its clients have
not, in general experienced difficulty in securing third party reimbursement for
Wound Care Center services and the use of Procuren from private insurers, some
hospitals have experienced denials, delays and difficulties in obtaining such
reimbursement. In some cases where Procuren reimbursement has been denied by a
payor, the hospitals have ceased providing Procuren to patients whose only means
of payment is through such payor. To the Company's knowledge, no widespread
denials have been received by hospitals regarding reimbursement for other Wound
Care Center services or reimbursement of management fees charged by the Company
to its hospital clients. The Company discusses coverage and reimbursement issues
with its hospital clients and third party payors on a regular basis. Such
discussions will continue as the Company seeks to maximize hospital
reimbursement for Procuren and other wound care services. Although no individual
coverage and reimbursement decision is material to the Company, a widespread
denial of reimbursement coverage for Procuren or other services would have a
material adverse effect on the Company's business, financial position and
results of operations.
Medicare regulations limit reimbursement for health care charges paid to
related parties. A party is considered "related" to a provider if it is deemed
to be controlled by the provider. On occasion, fiscal intermediaries under
29
<PAGE>
contract to HCFA to audit hospital Medicare claims have asserted that one test
for determining control for this purpose is whether the percentage of the total
revenues of the party received from services rendered to the provider is so high
that it effectively constitutes control. Although the Company believes it does
not currently receive sufficient revenues from any customer, including
Columbia/HCA, that would make it a related party, it is possible that such
regulations could limit the number of management contracts that the Company
could have with Columbia/HCA or any other client.
Competition
The Company's principal competition in the chronic wound care market
consists of specialty clinics that have been established by some hospitals or
physicians. Although numerous companies, many of which have resources greater
than the Company, are conducting research in the area of drugs to promote the
healing of chronic wounds, to the Company's knowledge, no competitive products
are currently on the market that actively promote wound healing. The Company
believes that the cost and quality of wound care services provided are the
principal factors that affect competition.
In the market for disease management products and services, the Company
faces competition from other disease management facilities, general health care
facilities and service providers, pharmaceutical companies, biopharmaceutical
companies and other competitors. Many of these companies have substantially
greater capital resources and marketing staffs, and greater experience in
commercializing products and services, than the Company. In addition, recently
developed technologies, or technologies that may be developed in the future, are
or may be the basis for products which compete with the Company's chronic wound
care products. The Company is aware that other companies are developing products
which may be in direct competition with Procuren. There can be no assurance that
the Company will be able to enter into co-marketing arrangements with respect to
these products, or that the Company will be able to compete effectively against
such companies in the future.
Facilities
The Company's headquarters and technical support facility is located in
East Setauket, Long Island, New York. The Company leases this 21,000 square foot
facility under a lease running through 2002. Given the current utilization of
its facilities and its option for additional space, the Company believes that
its facilities are adequate and suitable for its operation. The Company also
leases three regional offices for its wound care operations totalling 6,200
square feet, four freestanding Wound Care Centers totalling 7,500 square feet
and twelve production facilities totalling 21,600 square feet. The Company's
facilities at the hospital outpatient Wound Care Centers are owned or leased by
the hospitals.
Employees
As of June 30, 1996, the Company employed 489 full-time employees, of which
355 employees were in the wound care operations, 79 employees were in Procuren
production, 20 employees were in technical support and 35 employees were in
general administration and finance. The Company expects to add additional
personnel to its wound care operations in the next year. The Company believes
that its relations with its employees are good.
Legal Proceedings
On August 1, 1995 the Company entered into a memorandum of understanding to
settle a class action lawsuit filed against the Company and certain of its
officers by a shareholder. The settlement, if consummated, would dispose of
allegations by the shareholder that the Company failed to meet its disclosure
obligations with respect to certain practices of UltraMed, Inc. The Company has
denied any liability or wrongdoing, and the settlement would not be an admission
of any liability or wrongdoing by the Company or any of its officers or
employees. The proposed settlement is conditioned upon, among other things,
approval of the United States District Court for the Eastern District of New
York and confirmatory discovery by the parties. The proposed settlement, if
consummated, would require the Company to pay approximately $0.5 million of
which 50% is expected to be paid by the Company's insurer. The proposed
settlement would not have any impact on the Company's financial position or
results of operations since adequate provisions were previously established.
The Company is also a party to other litigation in the ordinary course of
business. The Company does not believe that such litigation is likely to have a
material adverse effect on its financial position or results of operations.
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<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ------
<S> <C> <C>
John Vakoutis ................................. 48 President, Chief Executive Officer and Director
John Prior..................................... 42 Senior Vice President of Finance, Chief Financial Officer
and Secretary
Howard Jones, Ph.D. ........................... 59 Senior Vice President of Technical Services
Carol Gleber .................................. 44 Senior Vice President of Operations
Gary Jensen ................................... 54 Vice President
Lawrence Stuesser, Jr. ........................ 54 Chairman of the Board
Gerardo Canet ................................. 50 Director
Lawrence Hoff ................................. 67 Director
Timothy Maudlin ............................... 45 Director
Gerard Moufflet ............................... 52 Director
</TABLE>
John Vakoutis has served as President and Chief Executive Officer of the
Company since April 1995 and director of the Company since November 1994. Mr.
Vakoutis joined the Company in November 1994 as an Executive Vice President and
President, Wound Care business. Prior to joining the Company, Mr. Vakoutis spent
ten years at Critical Care America ("CCA"), a New York Stock Exchange listed
home infusion therapy company. In his role as Senior Vice President and Chief
Operating Officer of CCA, Mr. Vakoutis was responsible for oversight management
of field and corporate operations. Additionally, he managed re-engineering
product delivery methods and the development of strategic partnerships with
hospitals and physician groups.
John Prior has served as Senior Vice President of Finance and Chief
Financial Officer since August 1995. From February 1991 to August 1995, Mr.
Prior served as Vice President of Finance and has been Secretary since October
1993. From July 1987 to February 1991, he served as Controller of the Company.
From 1979 to 1987, Mr. Prior held a variety of positions in the Health Care
Auditing/Consulting Group of KPMG Peat Marwick and was promoted to Senior
Manager in 1984.
Howard Jones, Ph.D. has served as Senior Vice President of Technical
Services since August 1995. From November 1993 to August 1995, Dr. Jones served
as Executive Vice President and President, Research and Development. Dr. Jones
served as a director of the Company from November 1993 through April 1996. Prior
to joining the Company, Dr. Jones served as Senior Vice President of Drug
Development at Cypros Pharmaceutical Corporation since May 1991, and prior to
that as Vice President at Amylin Pharmaceuticals, Inc., since May 1989. From
1984 to 1989, Dr. Jones served as a Senior Director of Research and
Administration for Bristol-Myers Squibb Products Division.
Carol Gleber has served as Senior Vice President of Operations since
February 1994. From 1989 to 1994, she served as Regional Vice President for the
Southwest Region. Prior to joining the Company, Ms. Gleber served as a
consultant to the Company from 1987 to 1989. From 1983 to 1987, Ms. Gleber
served as Vice President of VHAE Consulting Services and was responsible for the
National Strategy Practice which provided services to VHA hospitals and
physicians in diversification activities, including but not limited to
HMO/PPO's, Ambulatory and Outpatient Services.
Gary Jensen has served as Vice President Central Region, Wound Care
Business Unit since February 1995, and prior to that as Regional Vice President,
Southeast Region since 1987. From 1985 to 1987, Mr. Jensen served as President,
Jensen & Associates, a health management company. In that capacity, Mr. Jensen
provided management consultation regarding behavioral medicines, as well as
discussions regarding mergers, acquisitions, facility development and
operations.
Lawrence Stuesser, Jr. has been a director of the Company since May 1993
and has served as Chairman of the Board since July 1995. Mr. Stuesser is the
President and Chief Executive Officer of Computer People, Inc., an information
technology professional services and staffing company. From August 1993 to
October 1995 he was a private investor and independent business consultant. Mr.
Stuesser served as Chairman and Chief Executive Officer of Kimberly Quality
Care, Inc., a provider of home health care services, from January 1991 to July
1993. Prior to
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<PAGE>
that he was the Chief Executive Officer of that company since its formation in
September 1987. Mr. Stuesser is also a director of IVF America, Inc.
Gerardo Canet has been a director of the Company since July 1991. Since
February 1994, Mr. Canet has served as President and Chief Executive Officer and
a director of IVF America, Inc., a publicly traded health services concern. From
November 1993 until his resignation from the Company in January 1994, Mr. Canet
served as Executive Vice President and President, Wound Care business.
Previously, he served as Senior Vice President and President, Wound Care Center
Division of the Company since April 1989 and as Secretary since December 1990.
For 10 years prior to joining the Company, Mr. Canet served as Executive Vice
President, Chief Operating Officer and a director of Kimberly Quality Care,
Inc., and as President and Chief Executive Officer of Quality Care, Inc., a
predecessor of Kimberly Quality Care, Inc., a provider of home health care
services.
Lawrence Hoff has been a director of the Company since September 1990. Mr.
Hoff was President and Chief Operating Officer of Upjohn Company until his
retirement in January 1990. Mr. Hoff who was employed at Upjohn for 39 years,
became its President in 1984, Vice President and General Manager of the Domestic
Pharmaceutical Operations in 1974 and served as a director from 1973 until
Upjohn's merger with Pharmacia in 1995. Mr. Hoff is also a director of
MedImmune, Inc., Pathogenesis, Inc. and Alpha Beta Technologies, Inc., and
previously served as a director of the American Diabetes Association. Mr. Hoff
currently serves in various capacities in charitable organizations and was
Chairman of the Pharmaceutical Manufacturers Association in 1987.
Timothy Maudlin has been a director of the Company since 1984, and served
as Secretary of the Company from November 1984 to December 1990. Mr. Maudlin
served as President of the Company from October 1985 through December 1986. Mr.
Maudlin has been the Managing General Partner of Medical Innovation Partners, a
venture capital firm, since 1988 and since 1982 he has been an officer of the
affiliated management company of Medical Innovation Partners. Mr. Maudlin is
also a director of IVI Publishing, Inc. and Diametrics Medical, Inc.
Gerard Moufflet has been a director of the Company since November 1989.
Since 1989, Mr. Moufflet has served as Senior Vice President of Advent
International Corporation, a venture capital firm. Prior to joining Advent, Mr.
Moufflet served as Corporate Vice President in charge of various Baxter
International European operations and spent 17 years in marketing, financial and
general management positions with that company's European businesses.
32
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 30, 1996, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option) with respect
to the beneficial ownership of Common Stock by (i) each person who owned of
record or was known by the Company to own beneficially more than five percent of
the issued and outstanding shares of Common Stock, (ii) each director, (iii)
each executive officer, (iv) a former chief executive officer, and (v) all
directors and executive officers as a group.
Amount and Percentage Owned
Nature of ----------------------
Beneficial Before the After the
Name Ownership (1) Offering Offering
- ---- ---------- ------- -------
Parsnip River Company. ................. 603,913(2) 5.6% 5.0%
4422 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Timothy Maudlin......................... 61,068(3) * *
Russell Whitman......................... 49,000(4) * *
John Prior.............................. 27,563(5) * *
Lawrence Stuesser, Jr................... 48,500(6) * *
Lawrence Hoff........................... 10,000 * *
Howard Jones............................ 10,000(4) * *
Carol Gleber............................ 9,575(4) * *
Gerardo Canet........................... 4,000(4) * *
Gary Jensen............................. -- * *
Gerard Moufflet......................... -- * *
John Vakoutis........................... -- * *
All directors and executive officers
as a group (10 persons)............... 170,706(7) 1.6% 1.4%
- ----------
* Ownership does not exceed 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock.
(2) The general partners of Parsnip River Company, a Limited Partnership, are
David M. Winton, Sarah R. Winton and Timothy A. Stepanek.
(3) Includes 18,000 shares subject to currently exercisable options and 8,457
shares owned by Mr. Maudlin's spouse and children.
(4) Represents shares subject to currently exercisable options. Mr. Whitman
resigned as the Chief Executive Officer of the Company in April 1995.
(5) Includes 23,500 shares subject to currently exercisable options.
(6) Includes 33,500 shares subject to currently exercisable options.
(7) Includes 98,575 shares subject to currently exercisable options by all
directors and executive officers as a group.
33
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
Number of
Underwriter Shares
- --------- ---------
Smith Barney Inc....................................................
Hambrecht & Quist LLC...............................................
Vector Securities International, Inc................................
---------
Total......................................................... 1,250,000
=========
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $__ per share under the public offering price. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $__ per
share to other Underwriters or to certain other dealers. After the public
offering of the shares of Common Stock offered hereby, the public offering price
and such concessions may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of 187,500
additional shares of Common Stock at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase additional shares solely for the purpose of
covering over-allotments, if any, incurred in connection with the sale of the
shares offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares in such table.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Company and the Company's directors and executive officers have agreed
that, for a period of 90 days after the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., sell, offer to sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock.
The Underwriters and certain selling group members that currently act as
market makers for the Common Stock may engage in "passive market making" in the
Common Stock in accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A
permits, upon the satisfaction of certain conditions, underwriters and selling
group members participating in a distribution that are also market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. In general, under Rule 10b-6A, any Underwriter or
selling group member engaged in passive market making in the Common Stock (i)
may not effect transactions in, or display bids for, the Common Stock at a price
that exceeds the highest bid for the Common Stock displayed by a market maker
that is not participating in the distribution of the Common Stock, (ii) may not
have net daily purchases of the Common Stock that exceed 30% of its average
daily trading volume in such stock for the two full consecutive calendar months
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part and (iii) must identify its bid as bids made by a
passive market maker.
34
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Dorsey & Whitney LLP, Minneapolis, Minnesota and for the
Underwriters by Dewey Ballantine, New York, New York. As to matters governed by
Minnesota law, Dewey Ballantine will rely upon the opinion of Dorsey & Whitney
LLP.
EXPERTS
The consolidated financial statements of Curative Health Services, Inc. at
December 31, 1994 and 1995, and for each of the three years in the period ended
December 31, 1995, appearing or incorporated herein by reference in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein or incorporated herein by reference, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The matters of law discussed under the heading "Risk Factors--Potential
Government Regulation of Procuren" and in the second, third and fourth
paragraphs under the heading "Business--Government Regulation" as they relate to
matters of FDA law or regulation have been reviewed by Hyman, Phelps & McNamara,
P.C., FDA counsel for the Company, and have been included herein in reliance
upon the authority of such firm as an expert in such matters. The matters of law
discussed under the headings "Risk Factors--Patents and Proprietary Rights" and
"Business--Patents and Proprietary Rights" have been reviewed by Dorsey &
Whitney LLP, and have been included herein in reliance upon the authority of
such firm as an expert in such matters.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to the Registration Statement.
35
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the year ended December
31, 1995;
(b) the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996;
(c) the Company's Current Reports on Form 8-K filed on June 28, 1996 and
July 17, 1996; and
(d) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on June 26, 1991 with the
Commission, including any amendment or report filed for the purpose of
updating such description filed subsequent to the date of this
Prospectus and prior to the termination of the offering described
herein.
In addition, all documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering of the Common Stock being made
hereby shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the respective dates of filing of such documents. Any
statement contained herein or in a document all or part of which is incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Such requests
should be directed to John C. Prior, Chief Financial Officer, Curative Health
Services, Inc., 14 Research Way, Box 9052, East Setauket, New York 11733-9052,
telephone: (516) 689-7000.
36
<PAGE>
CURATIVE HEALTH SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ........................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995
and June 30, 1996 (unaudited) .......................................... F-3
Consolidated Statements of Operation for each of the years ended
December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1995 and 1996 (unaudited) ............................... F-4
Consolidated Statements of Stockholders' Equity for each of the years
ended December 31, 1993, 1994 and 1995 and for the six
months ended June 30, 1996 (unaudited) ................................. F-5
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1995 and 1996 (unaudited) ............................... F-6
Notes to Consolidated Financial Statements ............................... F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Curative Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Curative
Health Services, Inc. (formerly Curative Technologies, Inc. and subsidiaries) as
of December 31, 1994 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Curative Health Services, Inc. at December 1994 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
Melville, NY
February 3, 1996
F-2
<PAGE>
CURATIVE HEALTH SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1994 1995 1996
------- ------- -------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................................... $ 4,459 $ 2,835 $ 5,254
Marketable securities held-to-maturity ........................... 2,808 9,365 9,918
Accounts receivable (less allowance of $364 (1994),
$514 (1995), $629 (1996))....................................... 6,648 7,776 9,489
Prepaid and other current assets ................................. 912 820 1,036
------- ------- -------
Total current assets ..................................... 14,827 20,796 25,697
Property and equipment, net ...................................... 2,476 3,383 3,618
Other assets ..................................................... 1,289 851 870
------- ------- -------
Total assets ............................................. $18,592 $25,030 $30,185
======= ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable ................................................. $ 4,667 $ 5,066 $ 5,359
Accrued expenses ................................................. 2,399 2,992 2,731
Loans payable to banks ........................................... 373 -- --
Capital lease obligations ........................................ 121 163 163
------- ------- -------
Total current liabilities ................................ 7,560 8,221 8,253
Long term debt ................................................... 1,011 1,000 1,000
Capital lease obligations ........................................ 243 198 120
Stockholders' equity:
Preferred stock, $.01 par value per share; 10,000,000
shares authorized, none issued................................ -- -- --
Preferred stock, Series A Junior Participating, $.01 par value
per share, 500,000 shares authorized, none issued............. -- -- --
Common stock, $.01 par value per share; 50,000,000
shares authorized, shares issued and
outstanding -- 10,024,686 (1994), 10,426,769 (1995),
10,705,452 (1996)............................................. 100 104 107
Additional paid in capital ..................................... 44,034 45,474 46,356
Deficit ........................................................ (34,135) (29,925) (25,609)
Foreign currency translation adjustment ........................ (179) -- --
------- ------- -------
9,820 15,653 20,854
Subscription receivable ........................................ (42) (42) (42)
------- ------- -------
Total stockholders' equity ................................... 9,778 15,611 20,812
------- ------- -------
Total liabilities and stockholders' equity ............... $18,592 $25,030 $30,185
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
CURATIVE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $31,265 $40,567 $52,442 $24,929 $31,305
Costs and operating expenses:
Costs of product sales and services ......... 15,970 19,688 25,253 12,494 17,359
Selling, general and administrative ......... 12,717 15,967 19,145 8,877 9,613
Research and development .................... 7,852 6,480 4,143 2,394 --
Restructuring charge ........................ -- 1,684 -- -- --
------- ------- ------- ------- -------
Total costs and operating expenses ...... 36,539 43,819 48,541 23,765 26,972
------- ------- ------- ------- -------
Income (loss) from continuing operations
before interest income and minority
interest .................................... (5,274) (3,252) 3,901 1,164 4,333
Interest income ............................... 549 306 528 213 367
Minority interest in net loss of
consolidated subsidiary ..................... 336 218 -- -- --
------- ------- ------- ------- -------
Income (loss) from continuing operations ...... (4,389) (2,728) 4,429 1,377 4,700
Loss from discontinued operations ............. (188) (4,545) -- -- --
------- ------- ------- ------- -------
Income (loss) before income taxes ............. (4,577) (7,273) 4,429 1,377 4,700
Income taxes .................................. -- -- 219 69 384
------- ------- ------- ------- -------
Net income (loss) ............................. $ (4,577) $ (7,273) $ 4,210 $ 1,308 $ 4,316
======= ======= ======= ======= =======
Net income (loss) per common and common
equivalent shares from:
Continuing operations ..................... $ (.44) $ (.27) $ .39 $ .13 $ .38
Discontinued operations ................... (.02) (.46) -- -- --
------- ------- ------- ------- -------
Total ................................. $ (.46) $ (.73) $ .39 $ .13 $ .38
======= ======= ======= ======= =======
Net income (loss) per common and
common equivalent share
assuming full dilution from:
Continuing operations ..................... $ (.44) $ (.27) $ .38 $ .13 $ .38
Discontinued operations ................... (.02) (.46) -- -- --
------- ------- ------- ------- -------
Total.................................. $ (.46) $ (.73) $ .38 $ .13 $ .38
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding ............... 9,904 9,958 10,768 10,256 11,306
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares assuming full dilution .... 9,904 9,958 11,112 10,256 11,417
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
CURATIVE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
<TABLE>
<CAPTION>
Foreign
Common Stock Additional Currency Total
------------------ Paid in Translation Subscription Stockholders'
Shares Amount Capital Deficit Adjustment Receivable Equity
--------- ------ ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 .............. 9,900,642 $99 $43,728 $(22,285) $ (61) $(42) $21,439
Foreign currency translation
adjustment .......................... (54) (54)
Exercise of options ................... 7,200 21 21
Director share purchase program ....... 1,252 8 8
Net loss for 1993 ..................... (4,577) (4,577)
--------- ---- ------ ------- ----- ---- -------
Balance, December 31, 1993 .............. 9,909,094 99 43,757 (26,862) (115) (42) 16,837
Foreign currency translation
adjustment .......................... (64) (64)
Exercise of options ................... 98,250 1 196 197
Director share purchase program ....... 342 1 1
Shares issued for patent rights ....... 17,000 80 80
Net loss for 1994 ..................... (7,273) (7,273)
--------- ---- ------ ------- ----- ---- -------
Balance, December 31, 1994 .............. 10,024,686 100 44,034 (34,135) (179) (42) 9,778
Foreign currency translation
adjustment .......................... 179 179
Exercise of warrants .................. 5,803 --
Exercise of options ................... 396,280 4 1,397 1,401
Tax benefit from stock option
exercises............................ 43 43
Net income for 1995 ................... 4,210 4,210
--------- ---- ------ ------- ----- ---- -------
Balance, December 31, 1995 .............. 10,426,769 104 45,474 (29,925) -- (42) 15,611
Exercise of warrants (unaudited)....... 102,608
Exercise of options (unaudited) ....... 176,075 3 882 885
Net income for six months ended
June 30, 1996 (unaudited) ........... 4,316 4,316
--------- ---- ------- ------- ----- ---- -------
Balance, June 30, 1996 (unaudited) ...... 10,705,452 $107 $46,356 $(25,609) $-- $(42) $20,812
========= ==== ======= ======= ===== ==== =======
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
CURATIVE HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income .......................................... $ (4,577) $ (7,273) $ 4,210 $ 1,308 $ 4,316
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing activities:
Discontinued operations .................................. 188 4,545 -- -- --
Depreciation & amortization .............................. 803 1,032 998 343 403
Provision for doubtful accounts .......................... -- 388 150 150 470
Deferred revenue ......................................... (209) -- -- -- --
Write-off of abandoned patent applications ............... -- -- 382 126 --
Minority interest in net loss of consolidated subsidiary . (336) (218) -- -- --
Non-cash restructuring charges ........................... -- 752 -- -- --
Loss on sale of CTGmbH ................................... -- -- 111 -- --
Change in operating assets and liabilities:
(Increase) in accounts receivable ........................ (1,948) (901) (1,524) (1,291) (2,184)
(Increase) decrease in prepaid and other current and
non-current assets ..................................... (626) (60) 324 135 (215)
Increase in accounts payable
and accrued expenses ................................... 1,490 225 1,297 696 (13)
------- ------- ------- ------- -------
NET CASH (USED IN) PROVIDED BY
CONTINUING ACTIVITIES .................................... (5,215) (1,510) 5,948 1,467 2,777
NET CASH USED IN DISCONTINUED ACTIVITIES ................... (2,668) (404) -- -- --
------- ------- ------- ------- -------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES ..................................... (7,883) (1,914) 5,948 1,467 2,777
INVESTING ACTIVITIES:
Deferred patent costs ...................................... (241) (165) -- -- --
Purchase of UniqMed, Inc. .................................. (50) -- -- -- --
Purchase of CTSA ........................................... (135) -- -- -- --
Sale of CT GmbH ............................................ -- -- (286) (166) --
Purchases of property and equipment ........................ (920) (612) (2,001) (638) (612)
Purchases of marketable securities held-to-maturity ........ (8,643) (3,820) (12,418) (4,113) (7,560)
Sales of marketable securities held-to-maturity ............ 21,519 5,909 5,861 2,722 7,008
------- ------- ------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ..................................... 11,530 1,312 (8,844) (2,195) (1,164)
FINANCING ACTIVITIES:
Proceeds from loans and revolving line of credit ........... 425 403 -- 140 --
Proceeds from exercise of stock options and warrants ....... 29 198 1,401 239 885
Principal payments on loans, capital lease
obligations and revolving line of credit ................. (164) (139) (143) (83) (79)
Principal payments on loans from affiliates ................ (41) -- -- -- --
------- ------- ------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 249 462 1,258 296 806
Effect of exchange rate changes on cash and
cash equivalents ......................................... 18 (51) 14 12 --
------- ------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ......................................... 3,914 (191) (1,624) (420) 2,419
Cash and cash equivalents at beginning of period ........... 736 4,650 4,459 4,459 2,835
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ................................................ $ 4,650 $ 4,459 $ 2,835 $ 4,039 $ 5,254
======= ======= ======= ======= =======
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid ............................................ $ 51 $ 143 $ 119 $ 55 $ 20
======= ======= ======= ======= =======
</TABLE>
See Notes E and F for Non-Cash Transactions
See notes to consolidated financial statements
F-6
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and June 30, 1996 (Unaudited)
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: The Company was organized under the laws of the State of
Minnesota in October 1984. It is a disease management company in the chronic
wound care business. The Company manages a nationwide network of Wound Care
Centers that offers patients a multi-disciplinary comprehensive wound treatment
program. The Company's management agreements with hospitals and other health
care providers generally have a term of 5 years.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. In May 1995 the
Company sold its 62% interest in its German subsidiary (See Note B). Operating
results of that subsidiary for the first five months of 1995 are included in the
consolidated operating results. In August 1993, the Company acquired the
remaining interest in another foreign affiliate which was previously 50% owned
(See Note B). The joint venture was previously accounted for on the equity
method and effective with the acquisition, the accounts were consolidated. As
part of the restructuring of the Company in 1994 the operations of this
subsidiary were terminated. Intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Net Income (Loss) per Common Share: Net income (loss) per common and common
equivalent share is based on the weighted average number of common shares
outstanding for 1995 and the six months ended June 30, 1995 and 1996 plus
dilutive common share equivalents. Outstanding warrants and options have not
been included in the 1993 and 1994 computations as the effect of such would be
antidilutive.
Foreign Currency Translation: Assets and liabilities of subsidiary
operations denominated in foreign currencies are translated at rates in effect
at December 31, 1993 and 1994. Revenues and expenses have been translated at
average rates for the applicable periods. Local currencies are considered to be
the functional currency, and adjustments resulting from such translation are
included in foreign currency translation adjustment, a separate component of
stockholders' equity.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives (generally 5 to 7 years). Leased
equipment capitalized and leasehold improvements are amortized over the life of
the lease or the useful life of the related asset, whichever is shorter.
Research and Development: All costs relating to research and development
activities are expensed in the year in which they are incurred.
Other Assets: As of December 31, 1994, 1995, and June 30, 1996, other
assets consist of costs associated with filing patent and trademark applications
which totalled $1.3 million, $0.9 million, and $0.9 million, respectively.
During 1995 the Company wrote-off deferred patent costs of $0.3 million related
to patent applications no longer being pursued. In December 1992, the Company
received broad patent coverage on wound healing agents derived from platelets.
Costs and expenses related to this patent of $920,000 are being amortized over
the life of the patent (17 years) and trademarks of $75,000 are being amortized
over the estimated life of the trademark (20 years) using the straight-line
method.
Cash and Cash Equivalents: Cash and cash equivalents represent demand
deposits with banks, certificates of deposit with maturities of less than three
months at time of purchase and highly liquid money market fund investments.
Marketable Securities Held-to-Maturity: Held-to-maturity marketable
securities represent highly liquid money market instruments with maturities of
greater than three months at time of purchase. These securities, consisting
principally of securities of U.S. Government agencies maturing at various dates
through February 1997, are valued at amortized cost which approximates market.
The Company's investment policy gives primary
F-7
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE A -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
consideration to safety of principal, liquidity and return. The Company invests
its funds with institutions that have high credit ratings and to date has not
experienced any losses on its investments. In May 1993 the Financial Accounting
Standards Board (FASB) issued FASB No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" effective for fiscal years beginning after
December 15, 1993. This pronouncement requires all companies with investments in
debt and equity securities to classify these securities as held-to-maturity,
trading, or available for sale. The Company classifies its investments in such
securities as held-to-maturity as the Company has the intent and ability to hold
these securities to maturity. As of December 31, 1994 and 1995, the Company had
approximately $7,000 of unrealized losses and $5,000 of unrealized gains on
marketable securities, respectively, and at June 30, 1995 and 1996 the Company
had approximately $3,000 and $17,000 of unrealized gains on marketable
securities, respectively. The adoption of this statement on January 1, 1994 had
no effect on the Company's financial position or results of operations for the
year.
Concentration of Credit Risk: Substantially all of the Company's revenues
have been generated from Wound Care Centers which the Company has established as
cooperative ventures with acute care hospitals in the United States to provide a
multi-disciplinary treatment protocol for chronic wounds. The Company provides
contractual management services for fees and sells Procuren to acute care
hospitals and other health care providers. Credit is extended based on an
evaluation of the hospital's financial condition and collateral is generally not
required.
Revenues: Revenues are recognized when products are dispensed or as
contractual management services are rendered.
Income Taxes: The Company adopted FASB No. 109, "Accounting for Income
Taxes," effective January 1, 1993. Under FASB No. 109, the liability method is
used in accounting for income taxes, whereby deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
adoption of this statement had no effect on the Company's financial position or
results of operations for the year.
Prospective Accounting Changes: In 1995, FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation," which requires all companies to
either recognize expense for stock-based awards based on their fair market value
on the date of grant, or provide proforma disclosures of the effects "as if" the
Company had recognized the stock-based compensation expense. As prescribed by
this new accounting pronouncement, the Company will adopt the new rules in 1996.
As permitted by FASB No. 123, the Company will provide disclosure of the pro
forma impact on net income and earnings per share as if the fair value-based
method had been applied.
Interim Financial Statements: The consolidated balance sheet and statement
of stockholders' equity as of June 30, 1996 and the consolidated statements of
operations and cash flows for the six-month periods ended June 30, 1995 and June
30, 1996 have been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at June 30, 1996 and the
results of operations and cash flows for the six-month periods ended June 30,
1995 and June 30, 1996 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Reclassifications: The Company has reclassified the presentation of certain
information in the six months ended June 30, 1995 to conform with the six months
ended June 30, 1996 presentation format. This included the reclassification of
$433,000 to cost of product sales and services, those costs associated with the
Company's laboratory operations in the 1995 period previously presented as
selling, general and administrative expenses. Additionally, the Company has
classified costs of $996,000 related to technical services dedicated to the
support of its platelet releasate technology in cost of product sales and
services in the six months ended June 30, 1996. These costs were classified as
research and development in previous years since such costs were related to new
product development and drug discovery. In the Company's continuing effort to
focus on its wound care service business, during the second half of 1995 the
Company instituted a realignment of its business activities which included the
discontinuance of further product research and development.
F-8
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE B -- ACQUISITIONS AND DIVESTITURES
In August 1993, the Company acquired the remaining 50 percent interest in
its foreign affiliated joint venture, Curative Technologies S.A. (CTSA) for $0.1
million cash. This joint venture was previously accounted for on the equity
method. Effective with this acquisition, the accounts of CTSA were consolidated
and were immaterial to the Company's results of operations. As a result of the
acquisition, $0.2 million of deferred revenue, related to the 1991 sale of
co-marketing rights to its foreign affiliate, was realized in the 1993 statement
of operations. This amount was net of previously unrecognized equity in CTSA's
losses. The proforma results of operations of CTSA for 1993 are not presented
due to the insignificant impact on reported results. As part of the Company's
restructuring in 1994, the operations of this subsidiary were terminated and the
assets liquidated (See Note L).
During the second quarter of 1995, the Company sold its 62% interest in its
German subsidiary to the subsidiary's general manager. In connection with the
sale, the Company made a working capital commitment of 0.5 million Deutsche
Marks (dm) which was paid in 1995. Additionally, the Company is entitled to
future contingent payments of 30 percent of the former subsidiary's profits up
to 0.5 million dm. There are contingent payments of approximately one million dm
due the Company representing previously advanced intercompany loans. Since the
former subsidiary has had a history of operating losses, the Company has not
recorded any amounts due. Further, the Company remains a guarantor of the former
subsidiary's revolving credit facility of $1.4 million dm ($1.0 million) and is
obligated to make the interest payments on the outstanding indebtedness. The
accounting for the sale resulted in a charge to operations of $0.1 million in
1995. As a result of the transaction, the accounts of the foreign subsidiary are
no longer consolidated.
NOTE C -- PROPERTY AND EQUIPMENT
A summary of property and equipment and related accumulated depreciation
and amortization follows:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1994 1995 1996
------- ------- ---------
(In thousands)
<S> <C> <C> <C>
Property and equipment .............................. $3,339 $3,729 $4,261
Leased equipment capitalized ........................ 1,371 1,511 1,511
Leasehold improvements .............................. 1,113 1,895 1,975
------ ------ ------
5,823 7,135 7,747
Less accumulated depreciation and amortization ...... 3,347 3,752 4,129
------ ------ ------
$2,476 $3,383 $3,618
====== ====== ======
</TABLE>
NOTE D -- ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1994 1995 1996
------- ------- ---------
(In thousands)
<S> <C> <C> <C>
Incentive compensation and benefits ................. $1,354 $ 2,445 $2,336
Research and technical service contracts ............ 462 547 395
Restructuring (See Note L) .......................... 583 -- --
------ ------ ------
$2,399 $ 2,992 $2,731
====== ====== ======
</TABLE>
F-9
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE E -- LEASES
The Company has entered into several noncancellable operating leases for
the rental of certain office space expiring in various years through 2002. The
Company also leases certain equipment under noncancellable capital and operating
leases expiring in various years through 1999. The principal lease for office
space provides for initial monthly rental of $28,442 escalating to $40,482 in
the final year. The following is a schedule of future minimum lease payments, by
year and in the aggregate, under capital leases and noncancellable operating
leases with initial or remaining terms of one year or more at June 30, 1996:
Capital Operating
Leases Leases
------ --------
(In thousands)
July 1, 1996 - December 31, 1996.................. $110 $ 909
1997.............................................. 150 768
1998.............................................. 43 649
1999.............................................. 7 625
2000.............................................. -- 560
Thereafter ....................................... -- 741
---- ------
Total minimum lease payments ..................... 310 $4,252
======
Less amounts representing interest ............... (27)
----
Present value of net minimum lease payments
($163 current portion).......................... $283
====
Equipment acquired under capital leases amounted to $0.5 million, $0, $0.1
million in 1993, 1994, 1995, respectively and $0.1 million and $0 for the six
months ended June 30, 1995 and 1996. Rent expense for all operating leases was
$0.7 million, $0.7 million, $0.9 million for the years ended December 31, 1993,
1994, 1995, respectively, and $0.5 million and $0.7 million for the six months
ended June 30, 1995 and 1996, respectively.
NOTE F -- STOCKHOLDERS' EQUITY
Common Stock: In March 1994, the Company issued 17,000 shares of common
stock in consideration of patent rights related to its core platelet releasate
technology.
Director Share Purchase Program: In April 1993, the Company established a
Director Share Purchase Program (the "Program") to encourage ownership of its
common stock by its directors. Under the Program, each non-employee director can
elect to forego receipt of cash payments for director's annual retainer and
meeting fees and, in lieu thereof, receive shares of common stock at market
value equal to the cash payment. The Program authorized the issuance of up to
120,000 shares of the Company's common stock at market value. In 1993, 1994 and
1995, the Company issued 1,252, 342 and 0 shares under the Program,
respectively. At December 31, 1995, 118,406 shares of common stock were reserved
for future issuance under the Program.
Stock Options: The Company has a stock option plan which provides for the
granting of non-qualified or incentive options to employees, directors,
consultants and advisors. The plan authorized granting of up to 1,756,695 shares
of the Company's common stock at the market value at the date of such grants.
All options are exercisable at times as determined by the Board of Directors not
to exceed ten years after the grant date. Information as to options for shares
of common stock granted as of December 31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------------------------- -------------------------- -------------------------------
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------- ---------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Jan 1.......... 756,875 $1.25-$8.50 1,280,918 $1.25-$8.50 1,333,784 $ 1.55- $ 8.50
Granted ................... 541,370 $4.63-$6.50 476,000 $3.13-$4.88 297,700 $4.125- $15.50
Exercised ................. (7,200) $2.50-$4.24 (98,250) $1.25-$2.96 (396,280) $ 1.55- $ 7.00
Cancelled ................. (10,127) $4.75-$7.00 (324,884) $2.50-$8.50 (103,593) $ 2.50- $ 7.00
--------- --------- ---------
Outstanding Dec 31 ........ 1,280,918 $1.25-$8.50 1,333,784 $1.55-$8.50 1,131,611 $ 1.55- $15.50
======== ======== ========
Exercisable ............... 477,830 432,540 315,238
======== ======== ========
</TABLE>
F-10
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE F -- STOCKHOLDERS' EQUITY (Continued)
At December 31, 1995, 1,406,810 shares of common stock were reserved for
future issuance of stock options.
For the period January 1, 1996 through June 30, 1996, the Company granted
313,600 shares (exercise prices $13.50-$24.875), cancelled 42,331 shares
(exercise prices $4.75-$15.50) and 176,075 shares were exercised (exercise
prices $1.55-$17.50). As of June 30, 1996, there were 1,226,805 options for
shares of common stock granted and outstanding, of which 281,557 shares were
exercisable.
Warrants: As of December 31, 1995, a total of 166,667 shares of common
stock were issuable under outstanding warrants. The 166,667 shares are issuable
at $7.00 per share, exercisable for a period of five years, to five lenders in
connection with a bridge financing entered into in April 1991 and terminated
upon the closing of the Company's 1991 initial public offering. In August 1995,
the Company exchanged 5,803 shares of common stock for 12,500 shares issuable
under warrants originally issued in connection with a working capital loan
agreement entered into December 1990 and terminated in October 1991. In April
1996, the Company exchanged 102,608 shares of common stock for 166,667 shares
issuable under the aforementioned working capital loan agreement. There was no
cash exchanged in either transaction.
Rights Plan: On October 25, 1995, the Board of Directors of the Company
declared a dividend of one preferred share purchase right per share for each
outstanding share of common stock of the Company. The dividend was paid on
November 6, 1995 to shareholders of record on that date. Under certain
circumstances each right may be exercised to purchase one-one hundredth of a
share of Series A Junior Participating Preferred Stock, par value $.01, of the
Company for $65. The rights which are redeemable by the Company at $.01 per
right expire in November 2005. The purchase right issued under the Company's
Rights Agreement dated October 22, 1995 provides the holder "in the event of (i)
the acquisition of 15% or more of the Company's outstanding common stock by an
Acquiring Person (as defined in the Rights Agreement), (ii) the commencement of
a tender offer or exchange offer which results in a person or group owning 15%
or more of the Company's common stock, to exercise each right (other than rights
held by an Acquiring Person) to purchase common stock of the Company or a
successor company with a market value of twice the $65 exercise price.
NOTE G -- INCOME TAXES
The Company has accumulated approximately $28.0 million of net operating
loss carryforwards (N.O.L.'s) and research credits as of December 31, 1995 which
may be used to reduce taxable income in future years. The utilization of these
losses to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the net operating loss and research
credit carryforwards. The carryforwards begin to expire in fiscal year 1999 and
will continue to expire through fiscal year 2009. Additionally, based on
ownership changes which occurred in prior periods, it is expected that the
annual utilization of the otherwise available net operating loss and research
credit carryforwards will be limited by the provisions of Sections 382 and 383
of the Internal Revenue Code, as amended. As such, the Company may be restricted
as to the utilization of its net operating loss and research credit
carryforwards incurred prior to July 1991. There was no income tax provision for
1993 and 1994. The provision for income taxes for 1995 is as follows (in
thousands):
1995
-------
Federal .............................................. $ 1,161
State ................................................ 137
Utilization of N.O.L.'s .............................. (1,079)
-------
Total income tax provision ........................... $ 219
=======
A reconciliation of the federal statutory tax rate
with the effective tax rate is as follows:
1995
-------
Federal statutory tax rate ........................... 34.0%
State income taxes net of federal benefit ............ 2.0
Tax benefits of N.O.L.'s ............................. (31.0)
-------
Effective tax rate ................................... 5.0%
=======
F-11
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE G -- INCOME TAXES (Continued)
The Company has recorded a deferred tax asset of approximately $12.0
million at December 31, 1995 related to the aforementioned net operating loss
carryforwards and research credits. A valuation allowance of equal value has
been recorded which has the effect of reducing the carrying value of the
deferred tax asset to zero. The valuation allowance is of equal value since it
is more likely than not that none of the net operating loss will be utilized due
to the Company's history of operating losses and the uncertainty of future
profits. The valuation allowance decreased $0.5 million in 1995.
NOTE H -- LOANS PAYABLE AND LONG TERM DEBT
Loans payable to banks and long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1994 1995 1996
-------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Short term loans -- bank credit facility of
foreign subsidiary ................................ $ 373 $ -- $ --
====== ====== ======
Long term notes payable ............................ $1,011 $1,000 $1,000
====== ====== ======
</TABLE>
In December 1992 the Company's German subsidiary entered into a 1.4 million
deutsche mark (dm) revolving credit facility. In April 1994 this facility was
increased to approximately 1.9 million dm, with 1.4 million dm converted to a
term loan due in May 1998, and .5 million dm as a revolving credit facility
reviewed for renewal annually. The facility provides for 10.0% interest on
outstanding balances. The Company is a guarantor of this long-term facility for
up to 1.4 million dm ($1.0 million). At December 31, 1994 and 1995, 1.9 million
dm ($1,.2 million) and 1.4 million dm ($1.0 million), respectively, were
outstanding against this long-term facility. In May 1995, the Company sold its
62% interest in its German subsidiary. As part of the sale agreement the Company
continues to guarantee the long term loan and has assumed responsibility for the
interest payments on that loan (See Note B).
NOTE I -- MAJOR CUSTOMERS
In 1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996,
the Company derived 13%, 17%, 24%, 25% and 28% of its consolidated revenues from
one customer, respectively.
NOTE J -- DISCONTINUED OPERATIONS
On February 22, 1994, (effective January 1, 1994), the Company divested a
wholly-owned subsidiary, UltraMed, Inc. (UltraMed), through the sale of all the
issued and outstanding capital stock of UltraMed. Prior to the sale, UltraMed's
principal operations consisted of the sale and distribution of wound care
supplies and medical equipment which represented the Company's only business in
durable medical supplies and equipment. The purchase price for the stock was
$4.6 million, representing the net book value of UltraMed plus advances owed the
Company. The purchase price was payable pursuant to a promissory note, bearing
interest at an annual rate of 4%, payable in monthly installments associated
with the cash flow of the business but to be paid not later than December 31,
1996.
The note was secured by a stock pledge executed by the buyer in favor of
the Company, and a guarantee and security agreement executed by UltraMed
covering the assets of the business. In addition, the Company has provided the
buyer with certain indemnifications.
As a result of the divestiture, the consolidated financial statements
reflect the results of operations for UltraMed as discontinued. Revenues of the
discontinued business were $5.8 million for the year ended December 31, 1993. A
loss on disposal of UltraMed of $50,000 was charged to 1993 discontinued
operations.
F-12
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE J -- DISCONTINUED OPERATIONS (Continued)
Due to changes in Medicare reimbursement including fee schedule reductions
and changes in product coverage requirements and a U.S. Department of Justice
legal action and settlement (See Note K), the business of UltraMed was adversely
affected. In view of these events, the Company recorded a charge of $4.5 million
during the second quarter of 1994 principally related to the impairment of the
note receivable.
NOTE K -- LEGAL PROCEEDINGS
In December 1994 the Company entered into a settlement agreement with the
United States Department of Health and Human Services in connection with claims
raised under the Civil False Claims Act against the Company and UltraMed, a
former subsidiary which was sold in February 1994 (See Note J).
Under the settlement agreement UltraMed agreed to pay $2.1 million to the
United States, payable in equal semi annual installments through 1997 and the
Company guaranteed the obligations of UltraMed to the United States. The Company
advanced $0.3 million to UltraMed in 1994 in order for UltraMed to meet the
initial obligations under the settlement agreement. In connection with the
guarantee, the Company made payments totalling $1.6 million in 1995 to fully
satisfy the obligation. The Company charged operations $0.7 million in 1994 and
$1.2 million in 1995 related to the obligation. The payments and related charges
to operations were made as a result of the inability of UltraMed to liquidate
its assets at previously estimated values and the continuing deterioration of
the UltraMed business.
On August 1, 1995 the Company entered into a memorandum of understanding
concerning a settlement with a shareholder who filed a class action lawsuit
against the Company and certain of its officers. The proposed settlement is
conditioned upon, among other things, approval of the United States District of
New York and confirmatory discovery by the parties. The proposed settlement, if
consummated, would require the Company to pay approximately $0.5 million of
which 50% is expected to be paid by the Company's applicable insurance policy.
The proposed settlement would not have any impact on the Company's statement of
operations since adequate provisions were previously established.
The settlement, if consummated, would dispose of allegations by the
shareholder that the Company failed to meet its disclosure obligations with
respect to certain practices of UltraMed, a former subsidiary. The Company has
denied any liability or wrongdoing, and the settlement would not be an admission
of any guilt or wrongdoing, liability or misconduct by the Company or any of its
officers or employees.
The Company, in the ordinary course of business is the subject of or party
to various lawsuits, the outcome of which in the opinion of management, will not
have a material adverse effect on the consolidated financial statements.
NOTE L -- RESTRUCTURING CHARGE
The Company recorded a corporate restructuring charge of $1.7 million
during the second quarter of 1994. The restructuring plan included a significant
reduction in research and development activities, reduction in European
development activities, as well as a general reorganization of resources which
was approved by management in June 1994 and substantially completed by the end
of 1994.
The restructuring included the termination of 15 research personnel and the
termination of outside research contracts related to new drug discovery efforts.
Additionally, the Company reduced its European development activities with the
termination of 4 people responsible for the development of strategic alliances
for future products. Further, the restructuring included the discontinuance of
the Company's business of establishing a wound care program in a comprehensive
outpatient rehabilitation facility.
The restructuring charge included approximately $0.5 million for employee
severance and related costs, $0.4 million related to property and equipment
write-offs, $0.3 million related to research contract terminations, $0.1 million
in provisions for leases and other facility obligations and $0.1 million for
legal and other professional fees associated with the restructuring and
reorganization for the Company's operations. Also included is a charge of
F-13
<PAGE>
CURATIVE HEALTH SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE L -- RESTRUCTURING CHARGE (Continued)
$0.2 million for an uncollectible advance associated with the Company's efforts
to establish a wound care program in a comprehensive outpatient rehabilitation
facility. The employee severance costs principally covered a reduction of
personnel in research and development and European administration. The amount of
benefits paid in 1994 was $0.1 million covering 19 terminated employees. The
amount of benefits paid in 1995 was $0.4 million. The restructuring charges
included $0.9 million of costs requiring cash expenditures and the remaining
$0.8 million includes costs related to write-offs and provisions which do not
have cash requirements.
F-14
<PAGE>
[PICTURES]
<PAGE>
================================================================================
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the shares of Common Stock offered hereby, nor
does it constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person in any jurisdiction in which it is
unlawful to make such an offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any date
subsequent to the date hereof.
------------
TABLE OF CONTENTS
Page
---
Prospectus Summary ....................................................... 3
Risk Factors ............................................................. 6
The Company .............................................................. 13
Use of Proceeds .......................................................... 13
Price Range of Common Stock .............................................. 13
Capitalization ........................................................... 14
Dividend Policy .......................................................... 14
Selected Consolidated Financial Data ..................................... 15
Management's Discussion and
Analysis of Financial Condition and
Results of Operations .................................................. 16
Business ................................................................. 22
Management ............................................................... 31
Principal Stockholders ................................................... 33
Underwriting ............................................................. 34
Legal Matters ............................................................ 35
Experts .................................................................. 35
Available Information .................................................... 35
Incorporation of Certain Documents
by Reference ........................................................... 36
Index to Consolidated Financial Statements ............................... F-1
================================================================================
================================================================================
1,250,000 Shares
[LOGO]
Common Stock
------------
PROSPECTUS
, 1996
------------
Smith Barney Inc.
Hambrecht & Quist
Vector Securities International, Inc.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
SEC Registration Fee........................... $ 13,273
NASD Fee....................................... 4,349
Nasdaq Listing Fee............................. 10,000*
Accounting Fees and Expenses................... 50,000*
Legal Fees and Expenses........................ 200,000*
Printing Fees ................................. 75,000*
Blue Sky Fees and Expenses..................... 10,000*
Transfer Agent Fees............................ 5,000*
Miscellaneous.................................. 33,159*
---------
Total...................................... $ 400,781
=========
- ------------
* Estimates
Item 15. Indemnification of Directors and Officers.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company was serving at the request of
the Company or whose duties involved service as a director, officer, partner,
trustee, employee or agent of another organization or employee benefit plan,
reasonably believed that the conduct was not opposed to the best interests of
the Company. In addition, Section 302A.521, subd. 3, requires payment by the
Company, upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain instances. A decision as to required
indemnification is made, depending on certain circumstances, by a disinterested
majority of the Board of Directors present at a meeting at which a disinterested
quorum is present, by a designated committee of the Board, by special legal
counsel, by the shareholders, or by a court.
The Company's Fourth Restated Articles of Incorporation provide that a
director is not liable to the Company or its stockholders for monetary damages
resulting from a breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for transactions
from which the director derived an improper personal benefit; (iv) under the
Minnesota statutory provision making directors personally liable, under a
negligence standard, for unlawful payment of dividends or unlawful stock
purchases or redemptions; or (v) for any act or omission occurring prior to the
date of adoption of such indemnification provision.
The Company maintains a directors' and officers' insurance policy in the
aggregate amount of $0.1 million which insures the directors and officers of the
Company against losses arising from certain claims for any Wrongful Act (as
defined in the policy) by the directors or officers in their respective
capacities as such, or to the extent that the Company has indemnified such
directors or officers, which insures the Company against such losses when and to
the extent that the Company has indemnified such directors or officers for such
losses under the Company's Articles of Incorporation or Bylaws, by contract or
otherwise pursuant to applicable law.
II-1
<PAGE>
Item 16. Exhibits.
1.1 Form of Underwriting Agreement.
5.1 Opinion of Dorsey & Whitney LLP regarding legality.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Dorsey & Whitney LLP.*
23.3 Consent of Hyman, Phelps & McNamara, P.C.*
24.1 Powers of Attorney.*
- ----------
* Filed previously.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of East Setauket, State of New York on the 31st day of July, 1996.
CURATIVE HEALTH SERVICES, INC.
By /S/ JOHN VAKOUTIS
--------------------------
John Vakoutis,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed on the date indicated by or on behalf of the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
------- ------ ----
<S> <C> <C>
/S/ JOHN VAKOUTIS President, Chief Executive July 31, 1996
------------------------- Officer and Director
John Vakoutis (principal executive officer)
/S/ JOHN PRIOR Chief Financial Officer July 31, 1996
------------------------- (principal financial and
John Prior accounting officer)
* Chairman of the Board and July 31, 1996
------------------------- Director
Lawrence Stuesser, Jr.
*
-------------------------
Gerardo Canet Director July 31, 1996
*
-------------------------
Lawrence Hoff Director July 31, 1996
*
-------------------------
Timothy Maudlin Director July 31, 1996
*
-------------------------
Gerard Moufflet Director July 31, 1996
* By /S/ JOHN VAKOUTIS
-------------------------
John Vakoutis, attorney-in-fact
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1.1 --Form of Underwriting Agreement.
5.1 --Opinion of Dorsey & Whitney LLP regarding legality.
23.1 --Consent of Ernst & Young LLP.
23.2 --Consent of Dorsey & Whitney LLP.*
23.3 --Consent of Hyman, Phelps & McNamara, P.C.*
24.1 --Powers of Attorney.*
- ------------
* Filed previously.
1,250,000 Shares
CURATIVE HEALTH SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1996
SMITH BARNEY INC.
HAMBRECHT & QUIST LLC
VECTOR SECURITIES INTERNATIONAL, INC.
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Curative Health Services, Inc., a Minnesota corporation (the "Company"),
proposes to issue and sell an aggregate of 1,250,000 shares (the "Firm Shares")
of its common stock, par value $0.01 per share (the "Common Stock"), to you (the
"Underwriters"). In addition, solely for the purpose of covering
over-allotments, the Company proposes to sell to the Underwriters, upon the
terms and conditions set forth in Section 2 hereof, up to an additional 187,500
shares (the "Additional Shares") of Common Stock. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares."
The Company wishes to confirm as follows its agreement with you in
connection with the several purchases of the Shares by you.
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including a prospectus subject to completion, relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
<PAGE>
post-effective amendment. If an additional registration statement is prepared
and filed with the Commission in accordance with Rule 462(b) under the Act (an
"Additional Registration Statement"), the term "Registration Statement" as used
in this Agreement includes the Additional Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission and as such
prospectus shall have been amended from time to time prior to the date of the
Prospectus. Any reference herein to the registration statement, the Registration
Statement, any Prepricing Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Form
S-3 under the Act, as of the date of the registration statement, the
Registration Statement, such Prepricing Prospectus or the Prospectus, as the
case may be, and any reference to any amendment or supplement to the
registration statement, the Registration Statement, any Prepricing Prospectus or
the Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the Commission thereunder (collectively, the "Exchange Act")
and deemed incorporated by reference pursuant to Form S-3 under the Act. As used
herein, the term "Incorporated Documents" means the documents which at the time
are incorporated by reference in the registration statement, the Registration
Statement, any Prepricing Prospectus, the Prospectus or any amendment or
supplement thereto.
2. Agreements to Sell and Purchase. The Company hereby agrees, subject to
all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $___ per share (the
"purchase price per share"), the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time and from time to time prior to 9:00 p.m., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of 187,500
Additional Shares from the Company. Additional Shares may be purchased only to
cover over-allotments made in connection with the offering of the Firm Shares.
Upon any exercise of the over-allotment option, each Underwriter, severally and
not jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments as you may determine in order to avoid fractional
shares) which bears the same proportion to the number of Additional Shares to be
purchased by the Underwriters as the number of Firm Shares set forth opposite
the name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 10 hereof) bears to the aggregate number of
Firm Shares.
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3. Terms of Public Offering. The Company has been advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00
A.M., New York City time, on _________________, 1996 (the "Closing Date"). The
place of closing for the Firm Shares and the Closing Date may be varied by
agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. The place of closing for any Additional Shares and the Option
Closing Date for such Shares may be varied by agreement between you and the
Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request by written notice, it being understood that a facsimile
transmission shall be deemed written notice, prior to 9:30 A.M., New York City
time, on the second business day preceding the Closing Date or any Option
Closing Date, as the case may be. Such certificates shall be made available to
you in New York City for inspection and packaging not later than 9:30 A.M., New
York City time, on the business day next preceding the Closing Date or the
Option Closing Date, as the case may be. The certificates evidencing the Firm
Shares and any Additional Shares to be purchased hereunder shall be delivered to
you on the Closing Date or the Option Closing Date, as the case may be, against
payment of the purchase price therefor in immediately available funds by wire
transfer to an account designated by the Company.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto or any Additional Registration Statement to be declared effective
before the offering of the Shares may commence, the Company will endeavor
to cause the Registration Statement or such post-effective amendment or
Additional Registration Statement to become effective as soon as possible
and will advise you promptly and, if requested by you, will confirm such
advice in writing, when the Registration Statement or such post-effective
amendment or Additional Registration Statement has become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any
Prepricing Prospectus or the Prospectus or for additional information; (ii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) within the period
of time referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net worth
or results of operations, or of the happening
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of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented)
in order to state a material fact required by the Act or the regulations
thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented) to comply with
the Act or any state securities or Blue Sky law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to
obtain the lifting of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four copies of
the registration statement as filed with the Commission and of each
amendment thereto, including executed signature pages, financial statements
and all exhibits and Incorporated Documents thereto and will also furnish
to you, without charge, such number of conformed copies of the registration
statement as filed and of each amendment thereto, but without exhibits, and
Incorporated Documents thereto as you may reasonably request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which
you shall not previously have been advised or to which you shall object
after being so advised or (ii) so long as, in the opinion of counsel for
the Underwriters, a prospectus is required to be delivered in connection
with sales by any Underwriter or dealer, file any information, documents or
reports pursuant to the Exchange Act which upon filing becomes an
Incorporated Document, without delivering a copy of such information,
documents or reports to you prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company
has delivered or will deliver to you, without charge, in such quantities as
you have reasonably requested or may hereafter reasonably request, copies
of each form of the Prepricing Prospectus. The Company consents to the use,
in accordance with the provisions of the Act and with the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, prior to the date of the Prospectus,
of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as a prospectus
is required by the Act to be delivered in connection with sales by any
Underwriter or dealer, the Company will expeditiously deliver to each
Underwriter and each dealer, without charge, as many copies of the
Prospectus (and of any amendment or supplement thereto) as you may
reasonably request. The Company consents to the use of the Prospectus (and
of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers
to whom Shares may be sold, both in connection with the offering and sale
of the Shares and for such period of time thereafter as the Prospectus is
required by the Act to be delivered in connection with sales by any
Underwriter or dealer. If during such period of time any event shall occur
that in the judgment of the Company or in the opinion of counsel for the
Underwriters is required to be set forth in the Prospectus (as then amended
or supplemented) or should be set forth therein in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary to supplement or amend the
Prospectus, or to file under the Exchange Act any document which upon
filing becomes an Incorporated Document, to comply with the Act, the
Exchange Act or any state securities or Blue Sky law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above,
file with the Commission an appropriate supplement or
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<PAGE>
amendment thereto or Incorporated Document and will expeditiously furnish
copies thereof to the Underwriters and dealers in such quantities as you
shall reasonably request. In the event that the Company and you agree that
the Prospectus should be amended or supplemented, or that a document should
be filed under the Exchange Act which upon filing becomes an Incorporated
Document, the Company, if requested by you, will promptly issue a press
release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions as you may
designate and the Company will provide such information and file such
documents as may be reasonably required to effect such registration or
qualification; provided that in no event shall the Company be obligated to
file any general consent to service of process or to qualify to do business
in any jurisdiction where it is not now so qualified or to take any action
that would subject it to service of process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction
where it is not now so subject.
(h) The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
practicable after the end of such period, which consolidated earnings
statement shall comply with the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the Commission and (ii) from
time to time such other information concerning the Company as you may
reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating
this Agreement pursuant to Section 10 or Section 11 hereof), or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company to comply with the terms or fulfill any
of the conditions of this Agreement, the Company agrees to reimburse the
Underwriters for all out-of-pocket expenses (including reasonable fees and
expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares substantially in accordance with the description set forth in the
Prospectus.
(l) If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of
the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not sell,
offer to sell, contract to sell or otherwise transfer or dispose of any
Common Stock (or any securities convertible into or exercisable or
exchangeable for Common Stock), or grant any options or warrants to
purchase Common Stock, for a period of 90 days after the date of the
Prospectus, without the prior written consent of Smith Barney Inc. The
foregoing sentence shall not apply to (A) the Shares to be sold hereunder,
(B) any shares of Common Stock issued by the Company upon the exercise of
an option or warrant or the conversion of a security outstanding on the
date hereof, (C) any shares of Common Stock issued
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or options to purchase Common Stock granted pursuant to the Company's
existing employee benefit plans or the Company's non-employee director
stock plan or dividend reinvestment plan.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current executive officers and directors.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares.
(p) The Company will timely file with The Nasdaq Stock Market a
notification form for listing of additional shares on The Nasdaq National
Market with respect to the Shares.
6. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the provisions of the Act. The
Commission has not issued any order preventing or suspending the use of any
Prepricing Prospectus.
(b) The Company meets the requirements for use of Form S-3 under the
Act. The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective
amendment thereto or any Additional Registration Statement shall become
effective, and the Prospectus and any supplement or amendment thereto when
filed with the Commission under Rule 424(b) under the Act, complied or will
comply in all material respects with the provisions of the Act and, in the
case of such registration statement or Additional Registration Statement,
did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or in
the case of such Prospectus, did not or will not include an untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, except that this representation and warranty
does not apply to statements in or omissions from the registration
statement or the Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing
by or on behalf of any Underwriter expressly for use therein.
(c) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued, are fully paid and nonassessable,
are free of any preemptive or similar rights (other than such rights as
shall terminate upon completion of the offering contemplated hereby, as set
forth in the Registration Statement and the Prospectus) and have been
issued and sold in compliance with all Federal and state securities laws;
the Shares have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free of any
preemptive or similar rights; and the capital stock of the Company conforms
to the description thereof in the Registration Statement and the
Prospectus.
(d) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Minnesota with full
corporate power and authority to own, lease and operate its properties and
to
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conduct its business as described in the Prospectus, and is duly registered
and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a material adverse effect
on the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and its subsidiaries taken as
a whole (a "Material Adverse Effect").
(e) Wound Care Centers of America, Inc. (the "Subsidiary") is the only
subsidiary of the Company which conducts any business or has any
significant assets or liabilities; each other subsidiary of the Company is
inactive. The Subsidiary is a corporation duly organized, validly existing
and in good standing in the State of Delaware, with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly registered and
qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify would not have a Material Adverse Effect.
All the outstanding shares of capital stock of the Subsidiary have been
duly authorized and validly issued, are fully paid and nonassessable, and
are owned by the Company free and clear of any lien, adverse claim,
security interest, equity or other encumbrance, except as disclosed in the
Prospectus (or any amendment or supplement thereto).
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or the
Subsidiary, or to which the Company or the Subsidiary or any of their
respective properties is subject, that are required to be described in the
Prospectus but are not described as required. There are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Prospectus or to be filed as an exhibit to the
Registration Statement or an Incorporated Document that are not described
or filed as required by the Act or the Exchange Act. Neither the Company
nor the Subsidiary is involved in any strike, job action or labor dispute,
and to the Company's best knowledge no such action or dispute is
threatened.
(g) Neither the Company nor the Subsidiary is (i) in violation of its
respective articles or certificate of incorporation or by-laws, or of any
law, ordinance, administrative or governmental rule or regulation
applicable to the Company or the Subsidiary or of any decree of any court
or governmental agency or body having jurisdiction over the Company or the
Subsidiary, or (ii) in default in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or any other
evidence of indebtedness or in any agreement, indenture, lease or other
instrument to which the Company or the Subsidiary is a party or by which
the Company or the Subsidiary or any of their respective properties may be
bound except for such defaults that would not, singularly or in the
aggregate, result in a Material Adverse Effect.
(h) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (i)
requires any consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official (except such as may
be required for the registration of the Shares under the Act, which has
been or will be effected in accordance with this Agreement, and compliance
with the securities or Blue Sky laws of various jurisdictions) or conflicts
or will conflict with or constitutes or will constitute a breach of, or a
default under, the articles or certificate of incorporation or by-laws of
the Company or the Subsidiary, respectively, or (ii) conflicts or will
conflict with or constitutes or will constitute a breach of, or a default
under, any agreement, indenture, lease or other instrument to which the
Company or the Subsidiary is a party or by which the Company or the
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Subsidiary or any of their respective properties may be bound, or violates
or will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or the Subsidiary or
any of their respective properties, or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or the Subsidiary pursuant to the terms of any agreement or
instrument to which the Company or the Subsidiary is a party or by which
the Company or the Subsidiary may be bound or to which any of their
respective property or assets is subject, except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not,
singularly or in the aggregate, result in a Material Adverse Effect.
(i) The accountants, Ernst & Young LLP, who have certified or shall
certify the audited financial statements filed or to be filed as part of
the Registration Statement or the Prospectus (or any amendment or
supplement thereto), or incorporated by reference therein are independent
public accountants as required by the Act and the Exchange Act.
(j) The consolidated financial statements, together with the related
schedules and notes forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), comply with the
requirements of the Act and the Exchange Act and present fairly the
consolidated financial position, results of operations and changes in
stockholders' equity and cash flows of the Company on the basis stated in
the Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and
data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are accurately presented and prepared on a
basis consistent with such consolidated financial statements and the books
and records of the Company and otherwise on the basis stated in the
Registration Statement and Prospectus.
(k) The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Agreement; the execution and
delivery of, and the performance by the Company of its obligations under,
this Agreement have been duly and validly authorized by the Company, and
this Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or principles of public policy and subject to the
qualification that the enforceability of the Company's obligations
hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equitable principles.
(l) Except as disclosed in, or otherwise contemplated by, the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), subsequent to the respective dates as of which such information
is given in the Registration Statement and the Prospectus (or any amendment
or supplement thereto), neither the Company nor any subsidiary of the
Company has incurred any liability or obligation, direct or contingent, or
entered into any transaction that is material to the Company and its
subsidiaries taken as a whole, and there has not been any material change
in the capital stock, or material increase in the consolidated short-term
or long-term debt, of the Company, or any material adverse change, or any
development involving or which may reasonably be expected to involve a
prospective material adverse change, in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and its subsidiaries taken as a whole.
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(m) Each of the Company and the Subsidiary has good and marketable
title to all property (real and personal) other than Intellectual Property
(as defined below), as to which no representation is made pursuant to this
paragraph (m), described in the Prospectus as being owned by it,
respectively, free and clear of all liens, claims, security interests or
other encumbrances except (i) such as are described in the Registration
Statement and the Prospectus or in a document filed as an exhibit to the
Registration Statement or an Incorporated Document or (ii) do not,
singularly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company or the Subsidiary, and all the property
described in the Prospectus as being held under lease by the Company or the
Subsidiary is held by it under valid, subsisting and enforceable leases.
(n) The Company has not distributed and, prior to the later to occur
of the Closing Date and completion of the distribution of the Shares, will
not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the
Act.
(o) Each of the Company and the Subsidiary has such permits, licenses,
franchises, authorizations and clearances ("Permits") of governmental or
regulatory authorities, including, without limitation, the Food and Drug
Administration (the "FDA") of the U.S. Department of Health and Human
Services and/or any committee thereof and such Permits relating to the
provision of healthcare services and products by the Company or the
Subsidiary, as are necessary to own, lease and operate its properties and
to conduct its business in the manner described in the Prospectus, subject
to such qualifications as may be set forth in the Prospectus and except
where the failure to have such Permits would not, singularly or in the
aggregate, have a Material Adverse Effect; subject to such qualifications
as may be set forth in the Prospectus, each of the Company and the
Subsidiary has fulfilled and performed all its material obligations with
respect to the Permits, except where the failure so to comply would not,
singularly or in the aggregate, have a Material Adverse Effect, and no
event has occurred which allows, or after notice or lapse of time would
allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any Permit. Except as described
in the Prospectus, none of the Permits contains any restriction that is
materially burdensome to the Company or the Subsidiary. The Company's and
the Subsidiary's business practices do not violate any federal or state
laws regarding physician ownership of (or financial relationship with) and
referral to entities providing healthcare-related goods or services, or
laws requiring disclosure of financial interests held by physicians in
entities to which they may refer patients for the provision of
healthcare-related goods or services, except for any such violations that
singularly or in the aggregate would not have a Material Adverse Effect.
(p) Each of the Company and the Subsidiary owns, jointly owns or has
obtained valid and enforceable licenses for the patents, patent
applications, inventions, technology, trademarks, trademark registrations,
trade names, copyrights, trade secrets and rights described in the
Prospectus as being owned or jointly owned by or licensed to it or used by
it in the conduct of its business (collectively, the "Intellectual
Property") except to the extent that the failure to own or to obtain such
licenses for such Intellectual Property would not have a Material Adverse
Effect. Except as set forth in the Prospectus (i) to the Company's best
knowledge there are no rights of third parties to any such Intellectual
Property described in the Prospectus as being owned or jointly owned by or
licensed to the Company or the Subsidiary; (ii) to the Company's best
knowledge there is no infringement by third parties of any such
Intellectual Property described in the Prospectus as being owned or jointly
owned by or licensed to the Company or the Subsidiary, except to the extent
such infringement would not have a Material Adverse Effect; (iii) there is
no pending or, to the Company's best knowledge, threatened action, suit,
proceeding or
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claim by others challenging the Company's or the Subsidiary's rights in or
to any such Intellectual Property, and the Company is unaware of any facts
which would form a reasonable basis for any such claim; (iv) there is no
pending or, to the Company's best knowledge, threatened action, suit,
proceeding or claim by others challenging the validity or scope of any such
Intellectual Property described in the Prospectus as being owned or jointly
owned by or licensed to the Company or the Subsidiary, and the Company is
unaware of any facts which would form a reasonable basis for any such
claim; (v) there is no pending or, to the Company's best knowledge,
threatened action, suit, proceeding or claim by others that the Company or
the Subsidiary infringes or otherwise violates any patent, trademark,
copyright, trade secret or other proprietary rights of others, and the
Company is unaware of any facts which would form a reasonable basis for any
such claim; (vi) to the Company's best knowledge there is no U.S. patent
which contains claims that dominate any Intellectual Property described in
the Prospectus as being owned or jointly owned by or licensed to the
Company or the Subsidiary or which is necessary for the conduct of its
business except to the extent that any such domination would not have a
Material Adverse Effect; and (vii) there is no prior art of which the
Company is aware that may render any patent held by the Company or the
Subsidiary invalid or any patent application held by the Company
unpatentable which has not been disclosed to the U.S. Patent and Trademark
Office.
(q) Except as set forth in the Prospectus, the Company has not
received nor is it aware of any communication (written or oral) relating to
the termination or modification or threatened termination or modification
of the agreements described or referred to in the Prospectus under the
captions "Risk Factors-Reliance on Key Customer; Related Party Issues" and
"Risk Factors-Contract Terms and Renewals" that alone or in the aggregate
would have a Material Adverse Effect nor is it aware of any communication
(written or oral) relating to any determination or threatened determination
not to renew or extend any agreement described or referred to under such
caption at the end of the current term of any such agreement that alone or
in the aggregate would have a Material Adverse Effect.
(r) The property, assets and operations of the Company and the
Subsidiary comply in all material respects with all applicable federal,
state and local laws, rules, orders, decrees, judgments, injunctions,
licenses, permits or regulations relating to environmental matters (the
"Environmental Laws"). To the Company's best knowledge, neither the
Company's nor the Subsidiary's property, assets or operations is the
subject of any federal, state or local investigation evaluating whether any
remedial action is needed to respond to a release of any substance into the
environment regulated by or forming the basis of liability under any
Environmental Laws (a "Hazardous Material"). Neither the Company nor the
Subsidiary has received any notice or claim, nor are there any pending or,
to the Company's best knowledge, threatened or reasonably anticipated
lawsuits against the Company or the Subsidiary with respect to violations
of an Environmental Law or in connection with the release of any Hazardous
Material into the environment. Neither the Company nor the Subsidiary has
any material contingent liability in connection with any release of
Hazardous Material into the environment.
(s) The Company and the Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are customary in the businesses in which they are engaged;
all policies of insurance insuring the Company or the Subsidiary or their
respective businesses, assets, employees, officers and directors are in
full force and effect; the Company and the Subsidiary are in compliance
with the terms of such policies and instruments in all material respects;
and there are no material claims by the Company or the Subsidiary under any
such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause.
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(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(u) Neither the Company nor the Subsidiary nor, to the Company's best
knowledge, any employee or agent of the Company or the Subsidiary has made
any payment of funds of the Company or received or retained any funds in
violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the
Prospectus.
(v) The Company and the Subsidiary have filed all federal, state,
local and foreign tax returns and tax forms required to be filed; such
returns and forms are complete and correct in all material respects; and
all taxes shown by such returns or otherwise assessed that are due or
payable have been paid, except such taxes as are being contested in good
faith and as to which adequate reserves have been provided. All payroll
withholdings required to be made by the Company with respect to employees
have been made. The charges, accruals and reserves on the books of the
Company and the Subsidiary in respect of any tax liability for any year not
finally determined are adequate to meet any assessments or reassessments
for additional taxes; and there have been no tax deficiencies asserted and,
to the best knowledge of the Company, no tax deficiency might be reasonably
asserted and threatened against the Company or the Subsidiary that could,
singularly or in the aggregate, have a Material Adverse Effect.
(w) No holder of any security of the Company has any right (not
heretofore waived) to require registration of shares of Common Stock or any
other security of the Company because of the filing of the registration
statement or the consummation of the transactions contemplated by this
Agreement and, except as disclosed in the Prospectus, no person has the
right to require registration under the Act of any shares of Common Stock
or other securities of the Company. No person has the right, contractual or
otherwise, to cause the Company to permit such person to underwrite the
sale of any of the Shares. Except as described in or contemplated by the
Prospectus, there are no outstanding options, warrants or other rights
calling for the issuance of, and there are no commitments, plans or
arrangements to issue, any shares of capital stock of the Company or any of
its subsidiaries or any security convertible into or exchangeable or
exercisable for capital stock of the Company or any of its subsidiaries.
(x) Neither the Company nor any of its subsidiaries is, and, upon the
sale of the Shares to be issued and sold by it hereunder and application of
the net proceeds from such sale as described in the Prospectus under the
caption "Use of Proceeds," will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(y) The Company and its subsidiaries are in compliance with all
provisions of Florida Statutes ss. 517.075 and the regulations thereunder,
relating to issuers doing business with Cuba.
(z) The Incorporated Documents heretofore filed were filed in a timely
manner and, when they were filed (or, if any amendment with respect to any
such document was filed, when such document was filed), complied with the
requirements of the Exchange Act; and any further Incorporated Documents
will, when so filed, be filed in a timely manner and comply with the
requirements of the Exchange Act and, when read together with the other
information in the Prospectus, will not contain an untrue statement of a
material fact or omit to
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state a material fact required to be stated therein or necessary to make
the statements in the Prospectus not misleading.
7. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from and against any and all losses, claims, judgments, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter expressly for use in connection therewith; provided, however,
that the indemnification contained in this paragraph (a) with respect to any
Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to
the benefit of any person controlling such Underwriter) on account of any such
loss, claim, damage, liability or expense arising from the sale of Shares by
such Underwriter to any person if (i) a copy of the Prospectus shall not have
been delivered or sent to such person within the time required by the Act and
the untrue statement or alleged untrue statement or omission or alleged omission
of a material fact contained in such Prepricing Prospectus was corrected in the
Prospectus and (ii) the Company has delivered the Prospectus to the several
Underwriters in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in addition to any liability
which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
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or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter
and any such controlling person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with respect
to information relating to such Underwriter furnished in writing to the Company
by or on behalf of such Underwriter expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer or any such controlling
person based on the Registration Statement, the Prospectus or any Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such Underwriter's expense), and the
Company, its directors, any such officer, and any such controlling person shall
have the rights and duties given to the Underwriters by paragraph (b) above. The
foregoing indemnity agreement shall be in addition to any liability which the
Underwriters may otherwise have.
(d) If the indemnification provided for in this Section 7 is unavailable
to an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of the
Shares, or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other hand in connection
with the statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company bear to the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company and the Underwriters from the offering of the
Shares shall include the net proceeds (before deducting expenses) received by
the Company, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or by the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
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<PAGE>
(e) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective numbers of Firm Shares set forth opposite their names in Schedule I
hereto (or such numbers of Firm Shares increased as set forth in Section 10
hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any person
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.
8. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment
thereto or an Additional Registration Statement to be declared effective
before the offering of the Shares may commence, the registration statement
or such post-effective amendment or Additional Registration Statement shall
have become effective not later than 5:30 P.M., New York City time, on the
date hereof, or at such later date and time as shall be consented to in
writing by you, and all filings, if any, required by Rules 424 and 430A
under the Act shall have been timely made.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
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<PAGE>
business, prospects, properties, net worth, or results of operations of the
Company not contemplated by the Prospectus, which in your opinion would
materially, adversely affect the market for the Shares, or (ii) any event
or development relating to or involving the Company or any of its
subsidiaries, or any officer or director of the Company or any of its
subsidiaries, which makes any statement made in the Prospectus untrue or
which, in the opinion of the Company and its counsel or the Underwriters
and their counsel, requires the making of any addition to or change in the
Prospectus in order to state a material fact required by the Act or any
state securities or Blue Sky law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing
the Prospectus to reflect such event or development would in your opinion
materially, adversely affect the market for the Shares.
(c) You shall have received on the Closing Date an opinion of Dorsey &
Whitney LLP, counsel for the Company, dated the Closing Date and addressed
to you, to the effect that:
(i) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Minnesota
with corporate power to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), and is duly
qualified to do business as a foreign corporation and is in good
standing in each U.S. jurisdiction in which the character of the
business conducted by it or the location of the properties owned or
leased by it makes such qualification necessary, except where the
failure to be so qualified would not have a Material Adverse Effect;
(ii) The Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware,
with corporate power to own, lease, and operate its properties and to
conduct its business as described in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) and is duly
qualified to do business as a foreign corporation and is in good
standing in each U.S. jurisdiction in which the character of the
business conducted by it or the location of the properties owned or
leased by it makes such qualification necessary, except where the
failure to be so qualified would not have a Material Adverse Effect;
and the outstanding shares of common stock of the Subsidiary have been
duly authorized and validly issued and are fully paid and
nonassessable, and, to the knowledge of such counsel, are owned of
record by the Company free and clear of any liens, pledges or other
encumbrances, except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto);
(iii) The authorized capital stock of the Company is as set forth
under the caption "Capitalization" in the Prospectus, and the
authorized capital stock of the Company conforms in all material
respects to the description thereof incorporated by reference in the
Prospectus;
(iv) All the shares of capital stock of the Company outstanding
prior to the issuance of the Shares have been duly authorized and
validly issued, are fully paid and nonassessable and, to the knowledge
of such counsel, all of the shares of capital stock of the Company
issued since June 28, 1988 were offered and sold in compliance with
the securities registration and broker/dealer registration
requirements under the federal securities laws and applicable state
securities laws, or in compliance with applicable exemptions
therefrom;
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<PAGE>
(v) The Shares have been duly authorized and, upon issuance and
delivery to the Underwriters against payment therefor in accordance
with the terms hereof, will be validly issued, fully paid and
nonassessable and free of (A) any preemptive rights arising under the
Company's articles of incorporation or the Minnesota Business
Corporation Act or (B) to the knowledge of such counsel, similar
rights that entitle or will entitle any person to acquire any shares
of capital stock of the Company upon the issuance and sale of the
Shares by the Company;
(vi) The form of certificate for the Shares conforms to the
requirements of the Minnesota Business Corporation Act;
(vii) The Registration Statement and all post-effective
amendments, if any, have been declared effective under the Act and, to
the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
(viii) The Company has the corporate power to execute and deliver
this Agreement and to issue, sell and deliver the Shares to the
Underwriters as provided herein, and this Agreement has been duly
authorized by all requisite corporate action, executed and delivered
by the Company;
(ix) To the knowledge of such counsel, neither the Company nor
the Subsidiary is in violation of its articles or certificate of
incorporation or bylaws, or in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness filed as an exhibit
to the Registration Statement or any Incorporated Document;
(x) The execution and delivery of this Agreement by the Company
and the issuance, sale and delivery of the Shares pursuant hereto will
not violate or conflict with the articles or certificate of
incorporation or bylaws of the Company or the Subsidiary and will not
conflict with or constitute a breach of, or a default under, or result
in the creation or imposition of any lien, charge, or encumbrance upon
any property or assets of the Company or the Subsidiary pursuant to,
any agreement to which the Company or the Subsidiary is a party or by
which the Company or the Subsidiary or any of their respective
properties is bound that is an exhibit to the Registration Statement
or any Incorporated Document; and the execution and delivery of this
Agreement by the Company and the issuance, sale and delivery of the
Shares pursuant hereto will not violate any law, rule or regulation of
any governmental authority or regulatory body (assuming compliance
with state securities and "blue sky" laws), or any judgment, order or
decree known to such counsel and applicable to the Company or the
Subsidiary of any court, governmental agency or arbitrator;
(xi) No consent, approval, authorization or order of, and no
notice to or filing with, any governmental agency or body or any court
is required to be obtained or made by the Company or the Subsidiary
for the issuance, sale and delivery of the Shares pursuant to this
Agreement, except such as have been obtained or made and such as may
be required under state securities or "blue sky" laws;
(xii) To the knowledge of such counsel, (A) there are no pending
or threatened legal claims or governmental proceedings against the
Company or the Subsidiary, or to which the Company or the
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Subsidiary or any of their respective properties is subject, which are
required to be described in the Registration Statement or Prospectus
(or any amendment or supplement thereto) that are not described as
required and (B) there are no agreements, contracts, indentures, leases
or other instruments that are required to be described in the
Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration
Statement or any Incorporated Document that are not described or filed
as required, as the case may be;
(xiii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements
and the notes thereto and the schedules and other financial and
statistical data included therein, as to which such counsel need not
express any opinion) comply as to form in all material respects with
the requirements of the Act; and each document incorporated by
reference in the Prospectus, at the time it was filed with the
Commission, complied as to form in all material respects with the
requirements of the Exchange Act (except in each case for the
financial statements and the notes thereto and the schedules and other
financial and statistical data included therein, as to which such
counsel need not express any opinion);
(xiv) The statements in the Registration Statement and Prospectus
(except for the matters expressly covered by the opinions being
delivered pursuant to paragraph (d) and (e) of this Section 8, as to
which such counsel need not express any opinion pursuant to this
paragraph (c)(xvi)), insofar as such statements constitute a summary
of documents referred to therein or matters of law, are accurate
summaries and fairly present the information called for with respect
to such documents and matters in all material respects;
(xv) Except as described in the Prospectus, such counsel does not
know of any person who has the right, contractual or otherwise, to
cause the Company to permit them to underwrite the sale of any of the
Shares; and, to the knowledge of such counsel, neither the filing of
the Registration Statement nor the offering or sale of the Shares
gives rise to any rights for or relating to the registration of any
securities of the Company, except for any such rights as have been
satisfied, waived or terminated; and
(xvi) Such counsel has no reason to believe that any governmental
or regulatory authorization, approval, order, license, certificate,
franchise or permit obtained by the Company or the Subsidiary and
material to the Company's business, taken as a whole, is not in full
force and effect; and, to the knowledge of such counsel, neither the
Company nor the Subsidiary has received any notice of proceedings
relating to revocation or modification of any such authorization,
approval, order, license, certificate, franchise or permit which
revocation or modification would have a Material Adverse Effect.
In addition, such counsel shall state that although such counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectus, including review and discussion of the contents thereof, and
nothing has come to the attention of such counsel that has caused it to believe
that the Registration Statement, at the time the Registration Statement became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as of its date and as
of the Closing Date or the Option Closing Date, as the case may be,
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<PAGE>
contained an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or that any
amendment or supplement to the Prospectus, as of its date, and as of the Closing
Date or the Option Closing Date, as the case may be, contained or contains an
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no opinion with respect to the financial statements and the
notes thereto and the schedules and other financial and statistical data
included or incorporated by reference in the Registration Statement or the
Prospectus).
In rendering their opinion as aforesaid, counsel may rely as to matters
of fact upon certificates of officers of the Company and of governmental
officials, and as to matters of law upon an opinion or opinions, each dated the
Closing Date, of other counsel retained by them or the Company as to laws of any
jurisdiction other than the United States, the State of Minnesota or the State
of New York or the corporation law of the State of Delaware; provided that (1)
each such local counsel is acceptable to the Underwriters, (2) such reliance is
expressly authorized by each opinion so relied upon and a copy of each such
opinion or certificate is delivered to the Underwriters and is, in form and
substance, satisfactory to them and counsel for the Underwriters and (3) counsel
shall state in their opinion that they believe that they and the Underwriters
are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of Dorsey &
Whitney LLP, patent counsel for the Company, dated the Closing Date and
addressed to you to the effect that:
(i) To the knowledge of such counsel, each of the Company and the
Subsidiary owns, jointly owns or has obtained licenses for all patents
and patent applications relating to the Intellectual Property
described in the Prospectus as being owned or jointly owned by or
licensed to it;
(ii) To the knowledge of such counsel (A) except as described in
the Prospectus, there are no rights of third parties to any
Intellectual Property that is described in the Prospectus as being
owned or jointly owned by or licensed to the Company or the Subsidiary
and that is necessary for the conduct of its business; (B) except as
set forth in the Prospectus, there is no infringement by third parties
of any such Intellectual Property described in the Prospectus as owned
or jointly owned by or licensed to the Company or the Subsidiary,
except to the extent such infringement would not have a Material
Adverse Effect; (C) there is no pending or threatened action, suit,
proceeding or claim by others challenging the rights of the Company or
the Subsidiary in or to such Intellectual Property described in the
Prospectus as owned or jointly owned by or licensed to the Company or
the Subsidiary; (D) there is no pending or threatened action, suit,
proceeding or claim by others challenging the validity and scope of
the Intellectual Property described in the Prospectus as owned or
jointly owned by or licensed to the Company or the Subsidiary; and (E)
there is no pending or threatened action, suit, proceeding or claim by
others that the Company or the Subsidiary infringes or otherwise
violates any U.S. patent;
(iii) Although such counsel has not been asked to conduct, and
has not conducted, any independent investigation into the following
matters, to the knowledge of such counsel (A) there is no U.S. patent
which contains claims that dominate any Intellectual Property
described in the Prospectus as being owned or jointly owned or used by
or licensed to the Company or the Subsidiary and that is necessary for
the conduct of its business; (B) there is no prior art
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that has not been disclosed to the U.S. Patent and Trademark Office
that (x) renders invalid any patent described in the Prospectus as
being owned or jointly owned or used by or licensed to the Company or
the Subsidiary and that is necessary for the conduct of its business or
(y) renders unpatentable any patent application described in the
Prospectus as being owned or jointly owned by or licensed to the
Company or the Subsidiary and that is necessary for the conduct of its
business; and (C) there has been no inequitable conduct with respect to
the prosecution of any of the patents described in the Prospectus as
being owned or jointly owned by the Company or the Subsidiary and that
is necessary for the conduct of its business; and
(iv) The statements in the Prospectus under the captions "Risk
Factors --Patents and Proprietary Rights" and "Business -- Patents and
Proprietary Rights," insofar as such statements constitute a summary
of the legal matters, documents or proceedings referred to therein are
accurate in all material respects and fairly present the information
purported to be shown.
(e) You shall have received on the Closing Date an opinion of Hyman,
Phelps & McNamara, P.C., regulatory counsel for the Company, dated the
Closing Date and addressed to you to the effect that the statements in the
Prospectus under the captions "Risk Factors -- Potential Government
Regulation of Procuren" and "Business -- Government Regulation" and other
references therein to food and drug regulatory matters, insofar as such
statements constitute descriptions or summaries of applicable federal
statutes, laws, regulations, requirements or procedures concerning the FDA,
are accurate in all material respects and fairly present the information
purported to be shown in light of the circumstances under which they were
made.
(f) You shall have received on the Closing Date an opinion of Dewey
Ballantine, counsel for the Underwriters, dated the Closing Date and
addressed to you with respect to the matters referred to in clauses (v)
(other than subclause (B) thereof), (vii), (viii), (xiii) and the
penultimate paragraph of Section 8(c) hereof and such other related matters
as you may request. In rendering their opinion, Dewey Ballantine may rely
as to matters of Minnesota law upon the opinion of Dorsey & Whitney LLP.
(g) You shall have received letters addressed to you and dated the
date hereof and the Closing Date from Ernst & Young LLP, independent
certified public accountants, substantially in the forms heretofore
approved by you.
(h)(i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been instituted or, to the knowledge of the Company, contemplated by
the Commission at or prior to the Closing Date and any request of the
Commission for additional information (to be included in the registration
statement or the prospectus or otherwise) shall have been complied with;
(ii) there shall not have been any material change in the capital stock of
the Company nor any material increase in the consolidated short-term or
long-term debt of the Company from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), except as may otherwise be stated
in the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition
(financial or other), business, prospects, properties, net worth or results
of operations of the Company and its subsidiaries, taken as a whole; (iv)
neither the Company nor any of its subsidiaries shall have any liabilities
or obligations, direct or contingent (whether or not in the ordinary course
of business), that are material to the Company and its subsidiaries, taken
as a whole, other than those reflected in or
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<PAGE>
contemplated by the Registration Statement or the Prospectus (or any
amendment or supplement thereto); and (v) all the representations and
warranties of the Company contained in this Agreement shall be true and
correct in all material respects on and as of the date hereof and on and as
of the Closing Date as if made on and as of the Closing Date, and you shall
have received a certificate, dated the Closing Date and signed by the chief
executive officer and the chief financial officer of the Company (or such
other officers as are acceptable to you), as to the matters set forth in
this Section 8(h) and in Section 8(i) hereof.
(i) The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained
and required to be performed or complied with by it hereunder at or prior
to the Closing Date.
(j) The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably
requested.
All such opinions, certificates, letters and other documents shall be
satisfactory in form and substance to you and counsel for the Underwriters.
Any certificate or document signed by any officer of the Company and
delivered to you, or to counsel for the Underwriters, shall be deemed a
representation or warranty by the Company to each Underwriter as to the
statements made therein.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 8, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (f) and paragraph (h) shall be
dated the Option Closing Date in question and the opinions called for by
paragraphs (c) and (d) shall be revised to reflect the sale of Additional
Shares.
9. Expenses. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the registration statement (including consolidated
financial statements and exhibits thereto), each Prepricing Prospectus, the
Prospectus, and each amendment or supplement to any of them; (ii) the printing
(or reproduction) and delivery (including postage, air freight charges and
charges for counting and packaging) of such copies of the registration
statement, each Prepricing Prospectus, the Prospectus, the Incorporated
Documents and all amendments or supplements to any of them as may be reasonably
requested for use in connection with the offering and sale of the Shares; (iii)
the preparation, printing, authentication, issuance and delivery of certificates
for the Shares, including any stamp taxes in connection with the offering of the
Shares; (iv) the printing (or reproduction) and delivery of this Agreement, the
preliminary and supplemental Blue Sky Memoranda and all other agreements or
documents printed (or reproduced) and delivered in connection with the offering
of the Shares; (v) the registration of the Common Stock under the Exchange Act
and the additional listing of the Shares on The Nasdaq National Market; (vi) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states as provided in Section 5(g)
hereof (including the reasonable fees, expenses and disbursements of counsel for
the Underwriters relating to the preparation of the preliminary and supplemental
Blue Sky Memoranda and such registration and qualification); (vii) the filing
fees and the reasonable fees and expenses of counsel for the Underwriters in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc. in connection with the offering; (viii) the
transportation and other expenses incurred by or on behalf of representatives of
the Company (other than employees of Smith Barney Inc., Hambrecht & Quist LLC
20
<PAGE>
and Vector Securities International, Inc.) in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company; and (x) the performance by the Company of its
other obligations under this Agreement.
10. Effective Date of Agreement. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto or an Additional
Registration Statement to be declared effective before the offering of the Firm
Shares may commence, when notification of the effectiveness of the registration
statement or such post-effective amendment or Additional Registration Statement
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, by notifying the Company.
If any Underwriter shall fail or refuse to purchase Firm Shares which it
is obligated to purchase on the Closing Date and arrangements satisfactory to
the non-defaulting Underwriters and the Company for the purchase of such Firm
Shares by the non-defaulting Underwriters or by another party or parties
satisfactory to the non-defaulting Underwriters and the Company are not made
within 36 hours after such default, this Agreement shall terminate without
liability on the part of the non-defaulting Underwriters or the Company. In any
such case which does not result in termination of this Agreement, either the
non-defaulting Underwriters or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven (7) days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve the defaulting Underwriter from liability in respect
of such default under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not identified
in this Agreement who purchases Firm Shares which a defaulting Underwriter is
obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or The
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York shall have been
declared by either federal or state authorities, or (iii) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions, the effect of which on the financial markets of the United States is
such as to make it, in your judgment, impracticable or inadvisable to commence
or continue the offering of the Shares at the offering price to the public set
forth on the cover page of the Prospectus or to enforce contracts for the resale
of the Shares by the Underwriters. Notice of such termination may be given by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
12. Information Furnished by the Underwriters. The statements set forth
in the last paragraph on the cover page, the stabilization and passive market
making legends on the inside front cover page and the statements in the first,
third and last paragraphs under the caption "Underwriting" in any Prepricing
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Prospectus and in the Prospectus constitute the only information furnished by or
on behalf of the Underwriters as such information is referred to in Sections
6(b) and 7 hereof.
13. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 14 Research Way, Box 9052, East Setauket, New York 11733-9502,
Attention: John Vakoutis, President and Chief Executive Officer, with a copy to
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota 55402,
Attention: Timothy S. Hearn, Esq., or (ii) if to you, care of Smith Barney Inc.,
388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division, with a copy to Dewey Ballantine, 1301 Avenue of the Americas,
New York, New York 10019, Attention: Frederick W. Kanner, Esq.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors, its officers who sign the Registration
Statement and the controlling persons referred to in Section 7 hereof and, to
the extent provided herein, their respective successors and assigns and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Shares in his status as such purchaser.
14. Applicable Law; Counterparts. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
CURATIVE HEALTH SERVICES, INC.
By:
-------------------------------------
John Vakoutis
President and Chief Executive Officer
Confirmed as of the date first
above-mentioned.
SMITH BARNEY INC.
HAMBRECHT & QUIST LLC
VECTOR SECURITIES INTERNATIONAL, INC.
By: SMITH BARNEY INC.
By:
----------------------------------
Managing Director
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SCHEDULE I
CURATIVE HEALTH SERVICES, INC.
Number of
Underwriter Firm Shares
- ----------- -----------
Smith Barney Inc....................................
Hambrecht & Quist LLC...............................
Vector Securities International, Inc................
---------
Total.......................
1,250,000
=========
Exhibit 5.1
Curative Health Services, Inc.
14 Research Way
East Setauket, New York 11733-9052
Re Registration Statement on Form S-3
File No. 333-7247
Ladies and Gentlemen:
We have acted as counsel to Curative Health Services, Inc., a Minnesota
corporation (the "Company"), in connection with a Registration Statement on Form
S-3 (the "Registration Statement") relating to the sale by the company of up to
1,250,000 shares of common stock of the Company, par value $.01 per share
(including 187,500 shares to be subject to the Underwriters' over-allotment
option) (the "Common Stock").
We have examined such documents and have reviewed such questions of law as
we considered necessary and appropriate for the purposes of our opinions set
forth below. In rendering our opinions set forth below, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures and the conformity to authentic originals of all documents
submitted to us as copies. We have also assumed the legal capacity for all
purposes relevant hereto of all natural persons and, with respect to all parties
to agreements or instruments relevant hereto other than the Company, that such
parties had the requisite power and authority (corporate or otherwise) to
execute deliver and perform such agreements or instruments, that such agreements
or instrument have been duly authorized by all requisite action (corporate or
otherwise), executed and delivered by such parties and that such agreements or
instruments are the valid, binding and enforceable obligations of such parties.
As to questions of fact material to our opinions, we have relied upon
certificates of officers of the Company and of public officials. We have also
assumed that the Common Stock will be priced by the Pricing Committee
established by the authorizing resolutions adopted by the Company's Board of
Directors in accordance with such resolutions and will be issued and sold as
described in the Registration Statement.
<PAGE>
Curative Health Services, Inc.
August 1, 1996
Page 2
Based on the foregoing, we are of the opinion that the shares of Common
Stock to be sold by the Company pursuant to the Registration Statement have been
duly authorized by all requisite corporate action and, upon issuance, delivery
and payment therefor as described in the Registration Statement, will be validly
issued, fully paid and nonassessable.
Our opinions expressed above are limited to the laws of the State of
Minnesota.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Dated: August 1, 1996
Very truly yours,
/s/ DORSEY & WHITNEY LLP
------------------------
DORSEY & WHITNEY LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data," and to the use of our report dated February 3, 1996
in Amendment No. 2 to the Registration Statement (Form S-3 No. 333-7247) and
related Prospectus of Curative Health Services, Inc. dated August 1, 1996 and to
the incorporation by reference therein of our report dated February 3, 1996,
with respect to the Consolidated Financial Statements and Schedule of Curative
Health Services, Inc. included in its Annual Report (Form 10-K) for the year
ended December 31, 1995, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Melville, New York
August 1, 1996
